Public Bill Committee

(Except clauses 1, 4, 8, 189 and 209, schedules 1, 23, and 33 and certain new clauses and new schedules) - Clause 3  - Personal allowance for 2012-13 for those aged under 65

Amendment proposed (24 April): 10, in clause3,page2, line33,at end add—
‘(3) The Chancellor of the Exchequer shall review the overall impact on families of this section compared with other measures the Government is introducing and place a copy of the review in the Library of the House of Commons.’—(Owen Smith.)

Question again proposed, That the amendment be made.

Peter Bone: I remind the Committee that with this we are discussing clause stand part.

Iain McKenzie: In the previous sitting, I was in the middle of welcoming the Budget 2012 document. I referred to the lovely graphs that the Minister pointed out. I said that when my constituents come to my surgeries, bringing with them statistics such as the 81% increase in long-term youth unemployment or the 620,000 families in Scotland who will lose their family tax credit, I will give it my best go to point out those graphs to show them that they are not as badly off as they think they are. I suspect they might say that the only use they have for the document is to reduce their fuel bills by putting it on the fire.

Owen Smith: That was a good intervention. I enjoyed that, although I confess that I had forgotten that I was being intervened on—it is easily done.
I shall draw my remarks to a conclusion shortly, but I have one or two points to make before I do. I am delighted to see the hon. Member for Dover return to his seat, because one of my points relates to the VAT matters that he, my hon. Friend the Member for Easington and the hon. Member for Bristol West raised. I think it was the hon. Member for Dover who calculated the relative cost of VAT to types of individuals or households. Although those calculations were interesting, I could not challenge them, because they were his own.
The simplest thing for me to do, therefore, is quote the Exchequer Secretary, because in 2010 he answered a parliamentary question on VAT asked by my hon. Friend the Member for Gedling (Vernon Coaker), who asked the Chancellor of the Exchequer simply to estimate the net effect in cash terms, and as a proportion of average annual income and so on, of VAT on a group of households. The Exchequer Secretary was good enough to respond, saying that
“For the requested household types, the estimated impact of a one percentage point rise in the standard rate of VAT”
was £110 for a pensioner couple, £50 for a single pensioner, £180 for a couple with children, or £90 for a one-parent family. Of course, for the couple with children—the average couple—that translates into the £450 that we have quoted; for the one-parent family, it translates into £235; for the pensioner couple, £295; and for the single household, £125.
For the record, I think that the Government can no longer dispute those figures, which are their definitive take on the average cost to average households of the kinds described of a 1% and a 2.5% increase in VAT. I do not think those figures can be disputed, but I look forward to hearing the hon. Member for Dover have a go at it.

Charlie Elphicke: I simply point out that the figures I took for the cost of VAT were from the Office for National Statistics publication, “The effects of taxes and benefits on household income” for 2009-10—the latest available—which the Institute for Fiscal Studies refers to as TAXBEN. It is a key ONS publication that is regarded as very accurate. I calculated the VAT paid by each decile; those are the figures I gave in relation to the 2.5% rise. I cannot answer for the Treasury’s written answer or the circumstances behind it, but I am confident that the ONS publication is accurate because it is very reliable, and I think I can operate a calculator, although I stand to be corrected.

Owen Smith: I would not for a second think of making the cheap point that although only a couple of hours ago the hon. Gentleman disputed the accuracy of the ONS figures on growth, he now wants to rely on its figures for his calculations on the back of a fag packet, however much that fag packet costs. I, for one, will rely on the word of the Exchequer Secretary, who I know is a man of the greatest integrity and would not have provided anything but the most accurate Treasury estimates of the impact of VAT. I will rest on the number that he gave the House, which was £450 for the annual cost of a 2.5 percentage point rise in VAT for an average family.

Nigel Mills: I could not resist. I like this principle that we take either everything from what one source says as gospel, or nothing. Presumably, as the hon. Gentleman is taking everything the Minister says as gospel, he will accept the cost of reducing the rate from 50p to 45p.

Owen Smith: I would not accept that as gospel. However, the hon. Gentleman has provided me with an opportunity to ask a question of the Minister, in order to clarify his precise words regarding the impact of the 50p rate. He said again today that the impact would be negligible, and the Prime Minister said at Question Time last week that no money was being raised by the 50p rate. I still find that hard to square with the comments made by the Minister in a debate that I attended last week, which I will quote for the elucidation of the Committee. The question I asked the Minister was this:
“If the yield was less than £1 billion, how much less was it? Surely the Minister knows”.
The Minister did know, because he responded to me with these precise words:
“The central estimate, which the OBR has confirmed, is £700 million.”—[Official Report, 18 April 2012; Vol. 543, c. 372.]
The description has been “next to nothing” or “nothing”, but £700 million seems quite a lot to me, to be perfectly honest, especially in these straitened economic times. Perhaps the Minister wants to intervene to confirm once more that the additional sum, so far as he is aware, that the 50p rate raised was £700 million, as he said in last week’s debate.

David Gauke: Those are the figures, but the cost of abolishing the 50p rate, which we have done, and bringing it down to 45p is £100 million. That is the reduction in direct tax intake, although we have made it clear that indirect tax is likely to increase as a consequence, in the sense that more VAT will be paid. That is not part of the usual Budget calculations, but were that to be taken into account, the cost of the 45p rate versus the 50p rate would be negligible, if anything.

Owen Smith: We have made it plain on a couple of occasions that we do not buy that voodoo economics, just as I think the Treasury and Her Majesty’s Revenue and Customs do not buy it, which is why they had to say 31 times throughout the document that they thought that the calculation was hugely, highly or deeply uncertain. However, I am grateful to the Minister for putting that on the record, because there is a stark contrast between the candour with which he has just described the £700 million, and the slipshod way in which the Prime Minister has described the rate as raising “next to nothing”. That gap is quite extraordinary.

Jacob Rees-Mogg: If the hon. Gentleman does not accept the so-called voodoo economics of lower tax rates bringing in more taxation, can he explain why, when the tax rate went from 83p in the pound to 60p and then from 60p to 40p, tax revenues rose?

Owen Smith: I am grateful to the hon. Gentleman for that question; I have been waiting to respond to him on that point. There are several reasons well documented in academic literature, largely to do with the fact that the base of taxation was broadened significantly, and with the dramatic change in how stocks were dealt with during that period. The most telling rebuttal that I have come across of the Laffer curve argument, which the hon. Gentleman is making, came from George Bush’s senior adviser in the States in the period in which those policies were introduced. He subsequently said that he thought that Laffer curve economics was, bluntly, the last refuge of charlatans and crooks. I would not for a minute suggest that the hon. Gentleman is either a charlatan or a crook, but I point out that that particular piece of economics does not stand up to scrutiny, either in this country or in America.
The reasons for the changes in receipts are many and various, and not straightforwardly down to a knee-jerk response. We will have an opportunity to test Arthur Laffer’s theory in this country over the next five years or so. We will see whether it delivers greater revenues. I suspect that, like lots of the other predictions made by the Government, that prediction will fall flat on its face.

Fabian Hamilton: Does my hon. Friend have any concrete evidence to support the Minister’s spurious claim that if the rate of direct taxation goes down from 50p to 45p, the VAT take will go up?

Owen Smith: No. There is no concrete evidence. As I said, there are economic theories that indicate that individuals will work harder, earn more, and spend more on VATable goods, and that indirect taxation will therefore go up. The Government have calculated that essentially £2.9 billion of the £3 billion static cost that is to be lost to the Exchequer will be recouped by those changes. We think that is an extraordinary punt in the dark by the Government. If it is wrong, the Budget is not neutral, and the deficit will be higher than we have anticipated.

Ian Mearns: Even in an area such as the north-east of England, which is relatively impoverished compared with the rest of the UK, there is significant evidence that those with disposable income are putting it into savings rather than spending it in the local economy. That is being replicated across the country, because people lack confidence and are saving for what they expect to be a very wet, rainy day.

Owen Smith: Again, I can only agree that all the evidence indicates that that is the case. One need only look back at the out-turn figures for consumer household spending in the period when Labour temporarily reduced VAT from 17.5% to 15% to see that £3.5 billion extra was spent by consumer households. What has happened since VAT was put up from 17.5% to 20% corresponds almost precisely with that: there was a reduction of more than £3 billion in consumer household spending. Crucial demand in the economy has been sucked out by a muddle-headed decision to increase indirect taxation. The Government should consider all those factors openly, transparently and in the round. Our amendment would provide them with the means of doing that, and we urge them to accept it.

Question put, That the amendment be made.

The Committee divided: Ayes 13, Noes 15.

Question accordingly negatived.

Clause 3 ordered to stand part of the Bill.

Clause 5  - Main rate of corporation tax for financial year 2012

Owen Smith: I beg to move amendment 4, in clause5,page4,line12,at end add—
‘(3) The Chancellor of the Exchequer shall review the impact of the corporate tax structure including the principal rates and investment allowances on the level of business investment, and place a copy of the review in the Library of the House of Commons.’.

Peter Bone: With this it will be convenient to discuss the following:
Amendment 11, in clause5,page4,line12,at end add—
‘(3) The Chancellor of the Exchequer shall review the impact of the corporate tax structure on different sectors and place a copy of the review in the Library of the House of Commons’.
Amendment 12, in clause5,page4,line12,at end add—
‘(3) The Chancellor of the Exchequer shall review the impact of the corporation tax rate on growth, jobs, and investment in the economy, and produce a plan for jobs and growth, which he shall lay before the House of Commons.’.
Clause stand part.
Amendment 5, in clause6,page4,line19,at end add—
‘(4) The Chancellor of the Exchequer shall review the evidence in favour of using reductions in the headline rate of corporation tax as a means of promoting long term international competitiveness and place a copy of the review in the Library of the House of Commons.’.
Clause 6 stand part.

Owen Smith: Clause 5 sets the main rate of corporation tax for this financial year, 2011-12, and amends it, so that
“In section 5(2)(a) of FA 2011 (main corporation tax rate for financial year 2012 on profits other than ring fence profits)”
it is set at 24%, as opposed to 25%. Clause 6 changes the main rate for the following year, 2013-14, and effectively reduces that rate by a further percentage point to 23%. It also sets the main rate of corporation tax for oil and gas companies; those are the taxation rates referred to in the documents as the “ring fence” taxation rates. We are talking about the upper rate of corporation tax—the large profits rate that applies to companies with profits of between £300,000 and £1.5 million a year.
Our amendments are simple and helpful, seeking clarity about the impact of the rates on different areas of the economy and on business investment. They also probe, in respect of clause 6, the international effectiveness of tax competition and the international sustainability of tax competition. The questions around the CT rate are profoundly important, because this one-club golfer of a Chancellor, as he is described in one of the newspapers this morning, has one club in his bag, which is, by and large, corporation tax. He has bet the farm on business pulling this country out of recession. He has bet the farm on the ideological concept that the Government need to shrink the public sector and cut back on public sector spending, which is fancifully thought to be crowding out private sector investment and expenditure. If he does that, private sector investment and expenditure—business investment, in other words—will flood in, fill the gap, float our economy on a tide of exports and increase productivity. There is absolutely no evidence whatever for that fanciful view. In fact, the evidence that we saw yesterday, and that we have seen repeatedly over the two years that this Government have been in charge of the economy, is quite the reverse.
Amendment 4 effectively relates to business investment. It argues that in clause5 we should add:
“The Chancellor of the Exchequer shall review the impact of the corporate tax structure including the principal rates and investment allowances on the level of business investment, and place a copy of the review in the Library of the House of Commons.”
Amendment 11 relates to the sectoral impact and calls on the Chancellor to
“review the impact of the corporate tax structure on different sectors of the economy and place a copy of the review in the Library of the House of Commons.”
Amendment 12 calls on the Chancellor to look at the impact of CT rates on growth, jobs and broader investment in the economy, and to produce a plan for jobs and growth to lay before the House of Commons.
Amendment 5 to clause 6 says that the Chancellor shall
“review the evidence in favour of using reductions in the headline rate of corporation tax as a means of promoting long term international competitiveness and place a copy of the review in the Library of the House of Commons.”
That final point is important and applies across both clauses. The Government have invested enormous faith in the competitiveness of our tax system being not one of the principal drivers but arguably the principal driver of our economy in the coming years, and the principal means by which we incentivise investment in indigenous companies and attract foreign direct investment to the UK. Unfortunately, there is scant economic evidence in academic literature to suggest that that is the case; nor is there empiric evidence from the Government’s performance to date.
However, the Government undoubtedly believe it. A year ago in this Committee, possibly in this very room— I am not sure, as I was not here—the Exchequer Secretary, when describing the plans to reduce corporation tax, said:
“It is a considerable tax cut for businesses in order to get them to grow. Reducing corporation tax will reduce the revenue we take from an inefficient tax, thereby increasing the rate of return on investment and resulting in greater business investment, greater productivity, higher wages and salaries and more jobs.”—[Official Report, 4 May 2011; Vol. 527, c. 690.]
It is not going very well. As predictions go, that is right up there with the Office for Budget Responsibility’s view of what growth would do over the past couple of years: bigger business investment, greater productivity, higher wages and salaries, and more jobs. However, unemployment is on course to hit 3 million, which is 9.3% of the entire work force by the end of the year after next; wages, both public and private, have stagnated right across the country for two full years; business investment is predicted by the OBR to hit a 0.7% increase this year; and overall, all the Budget measures, including the CT rate change, are anticipated to increase GDP by 0.1%. That does not strike me as a terribly good record so far. The Government possibly have a few more years to go, so we must see whether they can improve it. At the moment they are scoring nul points, to continue the French theme.
In fairness to the Minister, when he made that bold prediction, he was backed up by the OBR, which he quoted from at the time, saying:
“It expected that the recovery would be supported by business investment, and the reductions in corporation tax underpinned its forecast for strong business investment growth over the next five years.”—[Official Report, 4 May 2011; Vol. 527, c. 688.]
The problem is very simple. The OBR has dramatically changed its mind over the past couple of years. The truth is that the OBR has got its growth projection wrong every single time it has attempted one. The OBR was first forced to revise down its figures for 2011 the very first time it had to report on how it was doing. It initially predicted 2.8% growth, before the emergency Budget in June 2010. It downgraded that to 2.3% after that Budget; 2.1% in November 2010; 1.7% in 2011; 0.9% in November 2011 and, finally, 0.8% in March 2012.
That is where we are. We have gone from 2.8% anticipated growth to 0.8%. Most commentators think that even 0.8% is pretty heroic. The Ernst & Young ITEM Club, for example, which uses the Treasury numbers and methodology, thinks 0.4% is more likely to be the number we hit this year. In truth, in light of yesterday’s growth numbers, which the OBR anticipated would be 0.5% higher than they were, it is hard to see that even 0.4% is going to be arrived at. What is certainly hard to see—I am increasingly struggling to find anyone outside the Government who is prepared to stand over this number—is the notion that growth will bounce back, like the proverbial rubber ball, from its current static position to 2% growth next year and 3% in successive years. I think that most people out there imagine that to be entirely fanciful.

Charlie Elphicke: It is important to ask what has happened with business investment, and why it has been lower than expected. At paragraph 3.62 of its economic and fiscal outlook, the OBR says:
“We therefore expect only moderate growth in business investment this year as the heightened uncertainty from the ongoing euro area difficulties limits firms’ investment plans to capital replacement rather than expansionary projects.”
No one could predict when exactly the euro would start to implode and end up in a complete crisis. Thank goodness we did not join it.

Owen Smith: That argument would have more credibility if it was not true that business investment was increasing in most of the eurozone countries. In fact, it is even increasing in some of the ones that are technically in recession right now. The hon. Gentleman need simply look at the OECD numbers to see that even countries in the eurozone are outstripping us. Companies in those countries—particularly in Germany, but also in France—are continuing to invest in capital projects.

John Pugh: The hon. Gentleman spoke briefly about the lamentable record of the OBR in predicting economic growth. I asked the Library some time ago to indicate which of the many organisations that predict economic growth has been the most consistently successful over the past decade and a bit, and the answer, in qualified terms, was the Treasury.

Owen Smith: So the hon. Gentleman is telling me that the Treasury, under a Labour Government, was the most efficient means of predicting of how the economy would perform. All I can say is that with a firmer hand on the tiller and a clear sense of macro-economics, we ended up with some pretty good projections. Unfortunately, questions are beginning to be asked not about the OBR’s independence, but about the extent to which it seems keen to present a positive perspective on how growth will perform in this country. I will be no bolder than that. I think that people are increasingly wondering how long the credibility of the OBR will remain untainted and unchallenged if it continues to present extraordinary growth numbers, because two newspapers said this morning that it is “absurd” to suggest that, from the current flatlining position, we will see 2% growth next year.

David Gauke: I want to be clear about what the hon. Gentleman is saying. Given his explicit criticism of the OBR record, is he suggesting that a future Labour Government would scrap it and return its responsibilities to the Treasury?

Owen Smith: No, I am not suggesting that. I am merely pointing out that to date, the OBR has had to revise down its growth projections five times, and it is likely to have to do that again. It has unfortunately had a shoddy hand of cards dealt to it by the Government. The OBR is having to dial down its growth predictions time after time because his Government introduced self-defeating austerity policies that are sucking demand out of the economy, crippling business confidence, and leading to the downward spiral of the economy. There is an increase in the cost of living for ordinary families in Britain. The OBR is merely having to reflect that; it is running behind the chaos caused by the Chancellor and his colleagues in the Government.

Ian Mearns: I am grateful to my hon. Friend for being so generous in giving way. The line that he is taking is very much backed up by other analysts in the field, apart from the OBR. A leading economic think-tank, the Ernst and Young ITEM Club, warned last week:
“Britain’s battered economy will grind to a halt this year as businesses sit on huge piles of cash”.
It warned that demand is being sucked out of the economy, despite British business sitting on huge piles of cash. What is going wrong?

Owen Smith: I shall expand on that point at some length later. My hon. Friend is entirely right that Britain’s corporate sector is currently sitting on cash and asset reserves of some £750 billion, which is an extraordinary amount of money. I would like to explore at some length why the corporate sector has done that. Crucially, businesses are not spending or investing money because they have absolutely no confidence that the Government can get our economy moving or that this country is a good place to invest right now, which is our point on corporation tax.

Sheila Gilmore: On that subject, I do not know whether my hon. Friend heard the same interview that I heard on the “Today” programme yesterday in which a businessman who owns such a company admitted that he had assets in hand that could be invested. When asked why he was not investing, he said that there was no demand in the economy for what he would produce, so there was no point in investing and expanding at the current time.

Owen Smith: I worked for some of those big companies in a former life, and I talk to people who still do. There is absolutely no confidence that this is an economy in which one would seek to invest right now, which is why they are sitting on cash. [ Interruption. ] There is a strange, quizzical look from a sedentary position over there.
Businessmen are also deeply concerned that we may well descend into further recession—before yesterday, of course, that was a question, now it is a fact—as a result of the activities of the Minister’s colleagues in the Treasury. These businessmen are not fools, and they have good reason for worrying about the prospects for growth in our country with posh and wrecks in charge.

Grahame Morris: Would my hon. Friend care to elaborate on the sectoral impact? I am concerned about the impact on the construction sector. A whole list of companies, such as Carillion in my area, are in difficulties as a consequence of the Government’s cutting back on infrastructure investments.

Owen Smith: The numbers do not make happy reading for the Government. Construction sector output decreased by 3% in Q1 of 2012, an absolutely cataclysmic collapse, following a decrease of 0.2% in the previous quarter. We have to remember that construction was booming when we left office. In large measure, construction can be taken as an aspect of the economy that reveals the symbiosis between the public and private sectors. Why was the construction industry booming at the tail end of the Labour Government?

Richard Harrington: Will the hon. Gentleman give way?

Mark Garnier: Will the hon. Gentleman give way?

Owen Smith: I will give way in a moment, but I want to finish my point first.
A Labour Government chose to stimulate the economy through public spending on things such as Building Schools for the Future in order to try to protect jobs and stop a recession turning into a depression. Why did we choose to do that? Because we understand macro-economics. We understand that there is a balance to be struck in the economy between the public and private sectors. When the private sector contracts and decides to tighten its belt, what do a Government need to do? We have learned the lesson of the 1930s: the Government need to expand their waistline. They need to spend money to stimulate the economy.

Mark Garnier: One of the things that was happening towards the end of the Labour Government was anticipation of a new Government and the end of the Labour era. I just want to throw into the general debate the question whether the hon. Gentleman can comment on the fact that the lack of business investment has somehow miraculously coincided with the rise of Labour in the opinion polls.

Owen Smith: I barely know where to start, to be honest. Business confidence has collapsed in this country because there is no sense that the current Government will deliver growth. Demand is not picking up. Demand is flat, which is why there is no good reason for businesses to invest.

Charlie Elphicke: Will the hon. Gentleman give way?

Richard Harrington: Will the hon. Gentleman give way?

Owen Smith: I give way to the hon. Member for Watford.

Richard Harrington: I cannot say how grateful I am that the shadow Minister has given way to me, as opposed to my hon. Friend the Member for Dover, whose comments I actually look forward to hearing shortly. I wish to make two points. First, it is quite obvious to most of the country that spending money you do not have like a drunken sailor on a binge is no answer to anything in the economy. Secondly and more importantly, will the hon. Gentleman comment on the fact that the recent construction figures to which he referred relate to a survey of construction companies? They do not apply to every construction company. They are temporary figures and apply to a few thousand out of many thousand of construction companies. In the past, the construction figures have been shown to be lumpy and change all the time. Rather than crowing at figures that have come out now, the hon. Gentleman should be a bit more patient and learn to wait and see what the position is in three or six months’ time.

Owen Smith: I am so pleased to have had that intervention. The argument about the ONS figures being a bit flaky really is the last refuge. It is like a drowning man clinging to a life raft. Let us be clear: not just in one quarter has growth gone down but in two. I am talking about 3% last quarter and 0.2% the quarter before that. It blipped up a little in the quarter before that, but it was down significantly the quarter before that.
Overall, since the beginning of the recession, all productive areas of the economy were down 4.3%. America has more than made up for the output that it has lost. No one on the Government side can point to the figures and draw anything but cold comfort from them.

Jacob Rees-Mogg: The hon. Gentleman referred to the economic policies of the 1930s, as the Labour party so often does, forgetting the fact that the then Chancellor, Neville Chamberlain, cut expenditure—at which point the economy began to grow. There is a relationship between keeping the public finances in order and leading back to economic growth.

Owen Smith: For some reason, the 1930s spring to the forefront of my mind when the hon. Gentleman rises to his feet to speak. Sometimes, I even go back as far as the 16th century when thinking of him. What I recall from the 1930s is the bankers’ ramp, which again is strangely appropriate when responding to the hon. Gentleman.

Iain McKenzie: I have some information for the hon. Member for Watford. There is more chance of seeing bankers on a drinking binge with the bonuses that they have been receiving than sailors.

Owen Smith: My hon. Friend has put forward a perfect segue to my reference to the bankers’ ramp.

Sheila Gilmore: While the hon. Member for North East Somerset might be a historian, I suspect that his knowledge goes back a bit earlier than the 1930s. From the history that I have read, my understanding has always been that the economy struggled until the end of the 1930s and that, sadly, the primary driver for recovery was re-armament in the period up to the war. [ Interruption. ]

Owen Smith: Hon. Members say that it is not true, but I am a historian, too. I studied history, not economics, and my father is a professor of history— not of the 1930s but of Labour history and to a certain extent, economic history. I think the real example from the 1930s is Snowden. The Government are making many of the same mistakes that Snowden made as Chancellor of the national Government in that period.

Ian Swales: The hon. Gentleman is making a powerful case for extra public spending. Will he say whether that will be financed in his model by borrowing, or will he give us a menu of cuts that he would make in order to finance the extra spending?

Owen Smith: Gosh, that was not predictable in any way, shape or form. I had not previously heard that point—[Hon. Members: “Answer it then.”] The answer we repeatedly give is that we would have done two things differently.
First, we would have had a slower and lower trajectory for repaying the deficit. We would have done something more like, for example, what the Tory Government did in the 1990s, post-ERM, taking seven or so years to pay the debt back, or what Labour and Tory Governments did in the 1970s, after the IMF crisis, when it was paid back over a slower period. We would certainly not have made the insane, ideologically-driven decision to try to reduce the budget deficit at a rate never attempted anywhere else in the developed world, over this period. That is the madness of the economic policy being pursued. Secondly, we would have grown the economy. There would, therefore, have been fewer problems.

Ian Swales: I thank the hon. Gentleman for that answer, but how does he square it with the comments of his own leadership? Does he have a budget for his input into the Committee, in terms of how much he is allowed to add to Labour’s commitments?

Owen Smith: I do not quite know what that intervention was, but I do not need a budget here. My job is to point out the flaws in the Bill and, more broadly, in the Government’s economic analysis and thinking. I am doing that, but frankly, I do not need to, because the Office for National Statistics did it for me yesterday. To refer to the 16th century or even earlier, the hapless serfs on the Liberal Benches support this Government—perhaps not all, but some—and the Government are potentially overseeing a decline in GDP and a trough in economic performance that we have not seen in this country since the 1870s. That is an historical precedent that no Government should seek to achieve, but this Government are in danger of doing so. The economy right now is a basket case, but only of the Government’s making.

Harriett Baldwin: I thank the hon. Gentleman for giving way, and I would like to take him back to the amendment under discussion. At the beginning, he asserted that there was no academic literature supporting the notion that lowering corporate rates of tax increased investment and employment. Yet there is an extensive body of academic research showing that the lower corporate taxes are, the higher the level of investment in a country, and that is widely supported in related academic literature. Is the hon. Gentleman planning to withdraw his economically inaccurate point?

Owen Smith: No, because I do not think it is economically inaccurate at all. There is a widespread and, bluntly, right-wing body of academic literature suggesting that. What I said is that empiric evidence—which I think we should rely on, rather than substandard, right-wing economic treatise—does not make that correlation clear. I will come to that later in my speech, perhaps referring to specific examples.

David Gauke: Does the hon. Gentleman therefore disagree with the following statement:
“A lower rate of Corporation Tax can boost the competitiveness of UK companies in the global economy and attract greater levels of foreign direct investment.”?

Owen Smith: I do not know for certain, but I would wager a sneaky fiver that that quote is from the shadow Chancellor, or possibly the former Prime Minister or the Leader of the Opposition. Of course, it is absolutely right, in principle. Corporation tax is one means by which one may stimulate the economy, which is why when we come to vote on this issue later this morning, or this afternoon—whatever time of the day it is—or possibly next month, we will not contest the reduction in the CT rate, because we think that the economy is desperate for any stimulus that it can get. Although we think that this is just one club in the Government’s bag and they are hacking away, we are not going to stop them hacking. We simply suggest that there may be other clubs in the bag that they might want to deploy at some point.

David Gauke: I think that it is only fair that I—

Owen Smith: Put me out of my misery.

David Gauke: Put him out of his misery, but before doing so, I am struck to hear that a moment or so ago, the idea that cutting corporation tax might result in increased investment and be good for the economy was a view of various right-wing treatise or whatever, yet when I put the quote to the shadow Minister, which was actually from the Budget 2007 report, it becomes entirely reasonable and he is in agreement with it. I am not sure quite where he is, but he seems to be all over the place.

Owen Smith: I am not all over the place at all. I simply believe that one needs to be nuanced and intelligent in economic management and macro-economic strategy, as opposed to—if you will pardon the pun, Mr Bone—bone-headedly pursuing the same failing policies. That is what the Government are doing. They are saying that there is but one way to go—cut public sector spending and the private sector will flourish—and we have but one tool to do it—provide confidence in the stability of the corporation tax rate and its downward trajectory. That is not the only tool that the Government have in their locker. There are other ways to stimulate the economy.
It is entirely legitimate for the Opposition to point to the fact that there is not a simple correlation between reducing corporate taxation rates and increasing business investment. Were it simple, were that correlation clear and were there empirical evidence in this country to back up some of the academic treatise, then what would we have seen in the past two years? I would have thought that the oxymoronic “expansionary fiscal contraction” would have been realised by now.
Surely to goodness if a Government decided that they had one great swing of their club—corporation tax, which is what the Government have said—and when the Chancellor’s emergency Budget came out he had said, “Right, business needs a lower, more competitive corporation tax, because we have to compete with the US and lower tax regimes, principally across Europe. We have to reduce our rate to be competitive,”, at that point they would have stimulated business and provided it with confidence, not only this year but next year and the year after that, even on the aspiration to a 20% corporation tax rate, which is 15% lower than in America. If it was going to work, businesses would have said, “Right, we’ve really got confidence in these guys. They really know what they are doing. Corporation tax will come down. Hell, let’s put our hand in our pocket and get on with spending to get out of recession.” What have they done? They have hoarded money—£754 billion of it. They are not spending, because the Government’s tool does not work.

Ian Mearns: Given that the Chancellor and his Front-Bench team of caddies have hacked their way around the course and found themselves on a part of it that they really wish they were not on, does my hon. Friend think that it is any surprise that the Government parties have developed a bunker mentality?

Owen Smith: Very good.

Iain McKenzie: I am glad that my hon. Friend has identified a way to discuss the Government’s aspirations to a 20% corporation tax rate. Like me, is he a bit puzzled about just where the Government will go if the G20 countries continue reducing their corporation tax? Will we see a bidding war? Will they be determined to take it below 20%? Where do the Government intend to draw the line?

Owen Smith: I do not think we know. We know that they aspire to 20%. We will ask some questions about that in a moment. I should like to ask the Minister what he thinks the optimal rate of corporation tax is if the aspiration is 20%. Is that the optimal rate or should we be gunning at some future point in the cycle for an even lower of corporation tax? But that is probably a point for one of the later amendments.

Charlie Elphicke: Will the hon. Gentleman give way?

Owen Smith: I will, absolutely, in a moment. I hope that, unlike some of his earlier interventions this will not—to continue the golfing analogy—like Bubba Watson’s famous round, end in tears.

Charlie Elphicke: I will indulge the hon. Gentleman by not discussing good walks ruined. Moving swiftly on, the issue of reducing corporation tax is one not simply of stimulus but of increasing receipts. The empirical evidence shows that when Ireland reduced its rate from 38% to 12.5%, annual corporate growth in that period was 24% so revenue increased. Australia saw a 16% increase; South Africa a 43% increase and the Czech Republic a 10% increase. Contrast that with the UK, the US and Japan which had static rates and did not see any increase at all. Indeed, over the period of the Labour Government receipts for corporation tax went up by only a third, whereas they doubled for income tax. It shows that if one reduces the rate one can often up the take.

Owen Smith: That is the age-old argument. That is the one we have been debating for the last half an hour or so. As I keep pointing out, empirical evidence in this country to date demonstrates that it is not accurate. If the Minister wants to try to give us an accurate projection he can. We know the static cost of reducing corporation tax over the spending period: it is £20 billion. Over the whole period, it will cost the Exchequer roughly £19.79 billion. In June 2010 the OBR looked at what that would deliver in terms of increased business investment, which has to be the principal trade-off. It said it thought it would derive £30 billion extra by 2016-17.
I suspect that the OBR broadly sticks to that position because it anticipates this massive bounce-back of 10% towards the back end of the period. The trouble is that nobody believes it will happen, just as nobody believes that we will see 2% and 3% growth in overall GDP. It is clearly a wildly optimistic projection. But what is absolutely certain is that £20 billion will be lost in revenues. If the Minister could update us later as to what he thinks both the cost and the benefit will be of the behavioural change—the increased receipts we will see as a result of increased activity or the straightforward increased business investment—I should be delighted. But there is absolutely no evidence to date that that will happen.
Yesterday’s ONS figures are very clear. Since Q3 2010, the UK economy has shrunk by 0.2%. It has flatlined over practically the whole of this Government’s period in office, whereas in the United States over the same period there has been a 2.8% growth in the economy. I think that is because this Government have pursued an ideological set of policies; they have painted themselves into a corner and now cannot get out. They have pulled the plug on public sector investment and as a consequence the lights went out on private sector investment and employment.
The supreme irony of yesterday’s figures, which I suspect will make slightly uncomfortable reading for Government Back Benchers such as the hon. Member for Dover, who probably want even lower levels of public sector spending, is that the one bit of the economy that expanded was Government spending—up 0.4%. Retail was flat, production was down by 0.5%, and construction went down.

Jacob Rees-Mogg: If Government spending increased, how can the lack of growth be due to austerity?

Owen Smith: Government spending increased this quarter on the previous quarter, but Government spending over the whole period is dramatically down. Over the whole spending period, given that we have seen only around 10% of the cuts that will be made, we will see a vast diminution in Government spending, at a rate that we have not seen anywhere else in the world at any point.
Businesses, as my hon. Friend the Member for Easington pointed out earlier, have responded to all that by hanging on to their cash. They have not gone out there on a spending spree because they think things are looking up but have hung on to it—£754 billion, according to the Ernst and Young ITEM club. Professor Peter Spencer of the university of York, the chief economic adviser to the ITEM club, spelled it out. He said:
“UK plcs have strong balance sheets and have built up large cash stockpiles.”
With the Treasury spending cuts depressing demand, business investment is the only possible source of growth in the years ahead. He said:
“We are going to continue on the critical list until companies get their chequebooks out—it’s as simple as that…Business investment has picked up nicely in the US”—
by contrast—
“but UK companies remain extremely risk averse, which is sapping strength from the economy”.
It is not just Ernst and Young. Deloitte’s similar study of a large number of companies showed that
“cash holdings of UK non-financial companies stood at £731.4 billion”—
Ernst and Young thinks that it is slightly more than that—
“in the third quarter of 2011, the highest level on record.”
US corporates are similarly holding vast amounts of capital—$1.73 trillion—but the rate at which they are spending is increasing at three time the rate of UK corporates. So while US corporates, too, have banked large amounts of money for a rainy day, they now have the confidence to start spending.
Ian Stewart, Deloitte’s chief economist, noted:
“While major corporates are profitable and cash-rich, governments and consumers in Western economies are, by and large, short of cash. If Western economies are to grow over the coming years businesses will need to do a lot of the spending.”
We all know that to be the fact, because as I said earlier, in macro-economics, simple rules apply to our economy as elsewhere. If the public sector’s sphere of the economy contracts, the private sector must expand to fill it, or we will see deficits and negative growth. That is precisely what we are seeing.

Ian Mearns: Professor Spencer added to that and said that he had grave concerns that households remained under a financial cosh, and that there was no way consumers could spend our way out of the situation, because there was not enough disposable income in the economy.

Owen Smith: Yes. We certainly would not advocate that the Government try to get themselves out of the economy by a dramatic expansion of consumer spending and debt; that would be foolhardy, especially given that we have, under our Government and this one, too high a level of consumer debt. However, we need some consumer spending, and at the moment, that is being entirely depressed by this Government’s actions. We certainly need corporate expenditure; that is vital. They absolutely have to, as Professor Spencer said, get their cheque books out and start spending. However, to do that, they have to have some confidence.

Richard Harrington: I really appreciate the shadow Minister giving way. He is convinced of the accuracy and precision of the ONS statistics that were published recently, so surely he noticed that consumer spending retail sales actually went up in the quarter.

Owen Smith: Well, from my retail figures, contribution to growth from retail, Q3 and Q1 2012, is zero. It was slightly up last time, slightly up this time, but flat over two quarters—zero.

Richard Harrington: The most recent figures show that, in the last quarter, sales actually went up. I would have said that it is an approximation anyway, and it might be adjusted. However, the hon. Gentleman is so convinced of the accuracy of his figures that I am sure he wants to comment on that.

Owen Smith: I said earlier that I was happy to concede that the figures could be adjusted. They have been adjusted several times recently. I presume that the hon. Gentleman has spotted which way the trend has been—by and large, down. Over the past series of revisions of ONS figures, on average they have been not up but down. If they are revised, the hon. Gentleman will know that they are never revised by more than 0.2% either way. Let us give him the benefit of the doubt and assume that they are revised by the full 0.2%. We would still have absolutely flat-line growth. We would not technically be in recession, but we would still be in recession.

Richard Harrington: I am truly perplexed. It seems strange that construction figures cannot be revised because, from what the hon. Gentleman said, they clearly show that we are in recession, but that the approximation may be revised up or revised down. I do not understand it, but I bow to his superior experience in such matters.

Owen Smith: I do not know whether the hon. Gentleman is misunderstanding me or mishearing me. I am saying that all the figures including the headline rate can be, according to the ONS, traditionally revised up or down by 0.2%. That is its standard margin of error that it applies to such figures. Over the past two years when they have been revised, they have been revised down—not up. Let us give the hon. Gentleman the benefit of the doubt and suggest that it might revise the figures up by 0.2%. It would still be flat growth, zero growth over the last period.
The OBR confirms such matters. In reports, it has repeatedly pointed to the fact that it is having to revise down and down and down the business investment that it had initially assumed. In its first report, the investment was down from 6.7% anticipated last year; 8.9% anticipated this year. It was revised down 0.8%, which is what we achieved in 2011. That is the most extraordinary figure of them all. The OBR was anticipating 6.7% growth in business investment in 2011. The out-turn figure was minus 0.8%. It is anticipating 7.7% growth this year. What is its projection now? Not 7.7%, but 0.7%. Business investment is collapsing in Britain. It is not going south; it is practically in the Antarctic.

Iain McKenzie: My hon. Friend has made a powerful argument that investment is collapsing in this country. The Government have said on numerous occasions that the recovery will be built on the backbone of small businesses throughout the country. Yet we see that small businesses will not benefit from corporation tax reductions. Indeed, if the Government’s target of reducing it to 20% is met, small businesses will be paying the same as large ones. How will that affect our economy?

Owen Smith: I beg your indulgence for a moment, Mr Bone, because I think that we shall deal with that issue at length later. One of the remarkable things about the Government is that they often seem to ignore small and medium-sized enterprises. In seeking to draw down the number for the top rate of corporation tax, they are doing nothing with the underlying 20% rate for small businesses, despite the fact that 90% of companies in the country pay at the small profits rate. Only 10% of companies in the country will benefit from the reduction in the upper rate of corporation tax. That strikes me as remarkable, but I shall return to the amendment on business investment.

Ian Lavery: Does my hon. Friend agree that it is again the Tories looking after the multinationals, rather than the people at the bottom end of the ladder? That is in terms of business as well.

Owen Smith: It begins to smell like that, because if there were a more even-handed approach across the whole of the business sector, the Government might do something to address the rate for smaller companies, which, as I have said, make up 90% of the companies paying.

David Gauke: I can see that the shadow Minister did not want to jump into that elephant trap, but he could not quite resist it. I cannot resist pointing out that when we came into office, the small profits rate of corporation tax was 21% and we inherited a plan to increase it to 22%. Not only did we stop that increase, but we cut the rate to 20%.

Owen Smith: And in this Budget they are leaving it at 20%, with no proposals to change it. The point I am making is that during that period the headline rate of corporation tax—the upper rate—was also higher, thereby maintaining a greater differential between the rate paid by large companies with big profits and small companies with far smaller profits. That is an important differential, because it is about a level playing field. Unfortunately, the Government are levelling the playing field in a way that disadvantages small companies.

Ian Lavery: If it is the Government’s contention that this cut in corporation tax will be one of the major stimuli that allow the economy to grow, I wonder whether my hon. Friend will be surprised to learn that the North East chamber of commerce’s assessment of the Budget says that
“relatively few North East firms will benefit from”
the cuts in corporation tax—
“and we would have preferred to see a greater focus on strengthening investment allowances”.

Owen Smith: That is the point, of course, because only 10% of UK companies will benefit from the change to the headline rate. Because I like to be entirely transparent, I point out that that 10% of companies pays around 70% of the receipts. The vast majority of those companies are not in the north-east, or in Wales, or on Teesside, or in Scotland, or anywhere else north of Watford, to be blunt. They tend to be in the south-east of England. The fact that the Government talk about wanting to rebalance the economy away from the south-east and financial services and towards productive areas of the economy in other parts of the country is belied by their actions on the CT rate.
We will come on to this again, but the other key juxtaposition that the Government should be thinking about is that with capital allowances, which they cut by £2.6 billion last year to pay for the corporation tax cuts. It is capital allowances that tend to benefit firms in the north-east and Teesside and Wales. In particular, that is companies such as the plastics manufacturer in Ebbw Vale, which I suspect only pays corporation tax at the lower rate and would benefit far more from generous capital allowances.

Ian Mearns: That is exactly right. The point that my hon. Friend is making brings to mind the quotation from George Bernard Shaw: when it comes to the politics of robbing Peter to pay Paul, there is usually a vociferous lobby from Paul.

Owen Smith: Indeed there is, and Paul has certainly been lobbying this Government hard and they have responded with alacrity. Paul has been shouting, “Jump!” and the Government have been saying, “How high?” In respect of the corporation tax, it is perhaps more, “How low can we go?”

Ian Swales: The hon. Gentleman talks about these companies being located in the south-east, but is it not true that quite a number of these companies are mobile? Does he regret that companies such as WPP and Shire Pharmaceuticals relocated out of the UK altogether under his Government? They are now considering coming back again.

Owen Smith: Can I ask a simple question? Can the hon. Gentleman name another company other than WPP and Shire? He cannot, because there were two companies, both of whom were trumpeted by the Government at the election. I know several people in Shire. It is an interesting instance. Let us see how many jobs Shire actually moved out of the country, because I think he will find it was practically none.
WPP is another good example. Sir Martin Sorrell is close to the Government. I suggest he is a friend of leading members of the Government. I thought the timing of WPP’s threat to leave the country and go to Ireland, and then follow-through, was interesting. Let us examine exactly what it meant when WPP went to Ireland. I am sure the hon. Member for Redcar will know that what it actually meant is that they moved to hold three board meetings a year in Dublin. They did not move any jobs. We need to be accurate and consider some aspects with a slight pinch of salt. I say that as someone who worked for some very big companies that were highly mobile—arguably, some of the most mobile companies in the world—so I have some insight into the way in which they think and the way in which they lobby for lower corporate taxes around the world. I do not say that we should not use corporation tax as a means of competition, but I do say that it is not a zero sum game and it is not the only tool that we should consider.

David Gauke: It strikes me that the essence of the hon. Gentleman’s argument is that cutting corporation tax does not help in getting business investment into the UK. Does he accept the logical extension of that argument? Does he think that raising corporation tax would not harm business investment in the UK?

Owen Smith: Let me be clear. At the risk of being ruled out of order, I feel as though my words are being somewhat twisted by the Minister. At no point have I indicated that I do not think that CT and addressing the headline rate might not be a useful tool for the Government to consider in terms of competitiveness. I said that in principle I entirely agreed with the remarks made by the former Chancellor on the 2007 Budget. However, I keep saying that it is not the only tool that the Government have. There are other means by which they can do things. There are also other arguments that can be deployed and other ways in which the Government could think about doing what they want to do, which is to get business to start investing. Again, on the basis of the evidence to date, there is little evidence that the Government are succeeding in getting business to invest through their corporation tax reductions.
I would welcome an intervention from the Minister now, or a response later, on why he thinks his corporation tax cuts, which are signalled to go down to 22%— arguably even 20%—are not stimulating businesses to start spending the enormous cash stockpile that they have. If CT is such a powerful tool, as he described only a year ago in Committee, and if it is the principal measure that the Government have to unlock expansion of export-led, business-led recovery, why is it not working? It manifestly is not working.

Seema Malhotra: First, does my hon. Friend agree that the specific impact that the Government expect corporation tax reduction to have on growth should be made clearer? Do they have forecasts? Is there research to back them up? Beyond perhaps anecdotal conversations, what are they expecting the change to be? Secondly, would not measures such as cutting VAT lead to similar outcomes in terms of stimulating consumer spending, which would give businesses greater profits to invest?

Owen Smith: Absolutely. Retail would benefit from reductions in VAT. Many in the productive sector would benefit and, of course, a short-term reduction in VAT has a benefit. The IFS or any other commentator would tell us that that is an effective and sharp stimulus to the economy, as opposed to what I fear may be happening with the CT rate, which is that companies have already trousered the benefit. Companies have looked at the prospect of corporation tax being reduced down to 20% over a long period, and they have baked it into their assumptions and projections for growth. They have trousered the Government’s CT rate and the Government are not likely to get very much for it. As I said earlier to the Minister, if he would like to tell the Committee what benefit in cash terms he thinks he will get for the cash terms £20 billion reduction in receipts over the spending period, we would all be much the wiser.
I will, if I may, now consider amendment 11 to clause 5, which calls on the Chancellor to review the impact of the corporate tax structure on different sectors. I hinted earlier at the principal argument I want to make. It is the one we made last year, so I do not intend to repeat it at great length. In essence, last year we expressed our concern that the corresponding £2.6 billion cut in capital allowances was a foolish trade-off for the Government to make. We argued that it would not help rebalance our economy away from the south-east or rebalance our economy towards manufacturing and away from financial and other services. We argued that, in the end, it would prove to be a foolish trade-off. At the time, the IFS concurred, stating,
“The largest beneficiaries…will be high-profit, low-investment firms.”
That would be banks, for example. It went on to say in its Green Budget that the cuts to capital allowances will
“have the largest impact on those firms with capital-intensive operations”.
For example, plastics manufacturers in Ebbw Vale.

Nigel Mills: On that basis, does the hon. Gentleman regret that the previous Government cut the rate of capital allowances from 25% to 20%?

Owen Smith: That is true. However, we also increased R&D tax credits throughout the spending period, and expanded lots of other measures. I will be candid with the hon. Gentleman and say we should have done more. We should have done more to rebalance our economy; we should have been more wary of the volume of our economy that was concentrated in the south-east and in financial services; and we should have been bolder in bucking the orthodoxy that has come largely from the right-wing commentariat I referred to earlier, that in Britain we cannot compete in manufacturing. We have seen countries such as Germany take an alternative strategy and perform creditably as a result. I think we have lots of lessons to learn from those developments as a Labour party, as a country and as a set of politicians.

Simon Kirby: I thank the shadow Minister for giving way. If he accepts that many mistakes were made under the previous Labour Government, will he not take the opportunity to apologise?

Owen Smith: Again, where do I start apologising? I did not say that I accept that there were many mistakes by the Labour Government. I responded to a specific point about whether we could have done more to support manufacturing. I think we could have done more; I do not have an issue about that. I am sorry that we did not do more to support manufacturing; it would have been a good thing to do, there is no doubt.
I am fundamentally far sorrier that the current Government are telling the country that they are going to do something to support manufacturing, but what are they doing? Instead, they are cutting back on capital allowances. They are not rebalancing the economy and are putting people out of work. They are going further with measures such as regional pay that are going to jeopardise further living standards for working people in parts of the country where we do not have a financial sector to support us.

Grahame Morris: On that point, I wonder if my hon. Friend could comment on the fact that there has been a long list of job losses in my constituency of Easington just since Christmas. I did a quick calculation. The most recent is Dewhurst, which lost over 100 jobs; Cumbrian Foods lost 500 jobs; Reckitt Benckiser, the pharmaceutical company, lost 500 jobs; Robertson Timberkit, a construction company, lost 300 jobs. There were also job losses at JD Sports and Fortress Doors. Would this cut in corporation tax assist any of those companies?

Owen Smith: I think some of those companies will benefit from it but many would benefit far more from something sector specific, something related to investment, something allowing them to invest in plant and machinery, something that is more targeted and genuinely trying to achieve what the Government say they want to achieve in respect of manufacturing. I find it peculiar that elsewhere in the Bill there are sector-specific measures such as the patent box and yet in respect of manufacturing there is nothing really specific and substantive to help people.
Again, the evidence of the gap between the Government’s rhetoric and reality is written there in the Red Book, in the OBR, in the ONS numbers. In 2011, compared with 2010, total production, including manufacturing, extraction and utilities, fell by 1.2%. Total services, including financial services, distribution and hotels grew a little: it was 1.6% over the period. Manufacturing was down 0.2% across the board. What does that translate into? [Interruption.]

Peter Bone: Order. There is a lot of back-chat going on. It is very difficult sometimes to hear the shadow Minister while he is making this brief speech.

Owen Smith: Thank you, Mr Bone. What do these reductions in investment and these policies translate into? They translate into unemployment numbers and a real impact on lives in places such as Redcar. In the north-east, unemployment stands at 11.2%. In Yorkshire and Humber, it stands at 9.9%. In the north-west, the unemployment rate is 9.3% and in Wales, it is 9%. In sharp contrast, the unemployment rate is 6.1 % in the south-west of England; 6.3 % in the south-east of England; and in the east of England it is 7%. They are still dreadful numbers and their human impact is awful but there is a gap. There is a gap in wealth, opportunity and even life expectancy between those parts of the country represented by many Opposition Members and the south-east where there is a greater preponderance of high-tech, financial-service-based and other specialist industry. We need to think about the economic levers we can pull as a collective of politicians in this place to try to change those statistics and to effect the rebalancing of the economy that we all want.
On that point, Mr Bone, I turn to amendment 12, which relates to jobs and growth and the fact that the Government really need to consider how the corporation tax will drive jobs and growth and whether now they really do need a plan for jobs and growth, as is manifestly the case. In aggregate, the unemployment numbers in this country now stand at 2.67 million, rising to 3 million over the period of this Government’s first term. Some 750,000 public sector workers are to be chucked out of their jobs. Little noticed in the blizzard of statistics from the OBR was one that I felt should have received more attention. Perhaps the fact that it did not is a measure of just how enormous the volume of job losses is. The OBR spotted that another 30,000 public sector jobs will go; 710,000 were announced as the latest avalanche in the last OBR figures. Many of those jobs will be lost by women and in parts of Britain where we can least afford to see more people on the dole. I repeat, another 30,000 are set to lose their jobs.
Growth, of course, is projected to hit 0.8%. Frankly, we would be grateful if growth hit 0.8% this year—surprised and grateful. We are now officially back in recession, of course.
The key point of the amendment is that the Government have alternative choices: they could decide to pull the rug on the headlong rush towards further recession and further self-defeating austerity; they could consider measures such as a temporary reduction in VAT, which was proven to be successful under the previous Labour Government; they could consider introducing a temporary holiday on NICs for new workers taken on by firms with fewer than 10 employees; or they could go much further and spread that right across the country, which would be such a simple measure to undertake. They have £900 million left in the bank, given that their current NIC holiday policy has so abjectly failed, yet they bone-headedly refuse to countenance that change. I cannot understand why, but I do not suppose for a moment, Mr Bone, that you understand it, either. They should do it, which is why the Minister should adopt amendment 12.
Amendment 5 to clause 6 asks a more philosophical question of the Minister: whether he and the Chancellor ought to consider the long-run impact of corporation tax and the long-run value of the headline rate of corporation tax as a means of delivering economic growth. As I said earlier, I am not the only one who wonders whether that is worthwhile; many others wonder about it, too.
Martin Wolf of the Financial Times, a respected commentator in anybody’s book, said of the 2012 Budget, which he thinks without significance in any respect:
“Vastly more dubious”—
more dubious than any of the other measures—
“are the cuts in corporation tax, to be lowered to 24 per cent, with the aim of cutting it to 20 per cent. Zero-sum competition among governments to attract mobile headquarters cannot make sense. Nor is there any reason to suppose the fiscal and economic benefits will be large. Meanwhile, the reduction in corporate tax will encourage retentions over distributions, while doing nothing to raise investment. A far more sensible proposal would be to increase investment incentives”.
I do not agree with all that Martin Wolf says in his statement, but he raises some serious questions. That takes us back to the challenge that I raised earlier with regard to the academic evidence. There is scant academic evidence of a clear correlation between the cutting of CT rates and jobs, growth and a raising of real economic performance. The OECD and EUROSTAT have both done big studies that find the correlation to be relatively weak. I have read an interesting recent study by Professor Jim Stanford of Canada that considers the relationship between tax rates, investment and growth. The study concludes:
“Since 2001, Canadian corporations have received a cumulative total of $745 billion in after-tax cash flow which they have not re-invested into Canadian fixed non-residential…projects. This growing wedge of excess corporate savings has translated into several outcomes which have undermined the vibrancy of Canada’s recovery from…recession—including excess accumulation of cash and short-term financial assets, a noted increase in the rate of payout of corporate dividends, and a sustained reduction in leverage by non-financial corporations.”
That paragraph sticks out, because it describes with unerring accuracy what is happening in Britain. Dividends are going up—they went up last year. Cash hoarding has gone up throughout this period. Distributions are increasing, and reinvestment is not increasing. We have a perfect storm in our country, and confidence is not being restored.
 Jacob Rees-Mogg  indicated dissent.

Owen Smith: The hon. Gentleman shakes his head. I want to see evidence that something different is going on. I would be delighted if it were, but I cannot see that from the figures.

Jacob Rees-Mogg: I am sorry to interrupt the hon. Gentleman, but he assumes a completely closed economy. Dividends are paid to pension funds and individuals, and that money circulates and is spent. Money that is deposited in banks is lent by bankers to the people who need to take out loans. The economy works on a circular basis. He assumes that there is no circulation.

Owen Smith: No, that is not true. The evidence before me leads me to conclude that the circle is not working. The money is not circulating. One need only look at the Bank of England lending report produced on Tuesday to see that money is not being lent by the banks. It is not circulating from the financial sector to the real productive economy. It is not being spent by non-financial companies or by financial companies—they are sitting on it, because they are worried that we may have a renewed recession, and that they will not have the resources to withstand one next time round.

Jacob Rees-Mogg: The idea that sitting on money does not have a beneficial effect is mistaken. When a deposit is made, banks can lend it out again, but this country still has a banking system with a loans-to-deposit ratio of more than 100%, so we need deposits to build up, so that lending can normalise.

Owen Smith: I am not simply talking about banks; I am talking about financial and non-financial corporates, and £754 billion is being sat on across the board. There is no long-term advantage to the broader economy from non-financial corporates sitting on their cash—leaving it in the bank and not investing it. I think the hon. Gentleman would accept that we would like non-financial corporates to spend their reserves, and to spend money in the economy. If they do not, there will not be a return to growth.
Secondly, of course it is right for banks to rebuild strong balance sheets and then lend, but they are not doing that; they are not lending. If it were true that they were being motivated to lend, and that the principal thing that motivated them to lend was confidence, we would be in a different position. We are not, and our position is bleak.

Jacob Rees-Mogg: Again, the hon. Gentleman misses the fundamental point. When the non-financials deposit with the banks, they provide the money that the banks can lend to other non-financials. That is part of the intermediation of the financial system.

Owen Smith: I accept that argument in part, but we come to the hard stop of the banks not lending, and the hard stop of the views of many commentators. I presume that the hon. Gentleman does not think that Deloitte is talking through its hat, or that Ernst and Young is talking through its trilby. The reality is that there are almost £800 billion of reserves in corporate bank accounts. That is not a healthy state of affairs, and it speaks to the fundamental lack of confidence that the Government will deliver growth in the economy. Corporates are spending money in other parts of the world, but they are not spending it in Britain, because they are not confident that Britain will provide them with an adequate rate of return on their capital in this market. That is the reality and that is what the Government should consider.
America is doing different things; it is considering a different corporation tax for manufacturing, it is increasing the amount of taxes gathered from businesses on their overseas operations, and it is increasing the productivity of its economy, which is up 2.8%. It is doing something right; our Government are manifestly doing something wrong. The amendments would help the Government to reflect on what they are doing wrong, and would help the nation to see where it might put them straight.

Nigel Mills: It is good to serve under your chairmanship again, Mr Bone. It is a particular pleasure to speak about corporation tax, because it relates to the job I used to have, so I have a chance of knowing a little about the subject I am talking about, which some might say is progress.

Owen Smith: Is that an insult?

Nigel Mills: I was trying to insult myself, not the hon. Gentleman. He has requested various reviews of corporation tax. We would probably have to replace the House of Lords with a new Library to find room for all the reviews being requested. Some people might say that that was a more productive use of space.
If we were to review corporation tax, we should review its whole fundamental structure. It is only two or three years ago that we rewrote the corporation tax code under the Corporation Tax Act 2009, which has, I think, 1,330 clauses and 613 pages. The entire tax policy is well worth the read. If we look at the general position of corporation tax in our tax field, in the out-turn for 2010-11, corporation tax was just above 8% of our total tax take. That will fall by the end of this Parliament to less than 7% of our total tax take. We will see that trend accelerate, because as other members of the Committee have said, there will be a general drift down of corporation tax rates as we try to remain competitive with other nations, which will no doubt take a similar direction.
At a time when we expect the share of our tax revenues from corporation tax to fall, we should be trying to find a way to simplify the corporation tax code radically, so that it is less burdensome for companies to administer it themselves, and less burdensome for the state to administer. I am not completely sure that that is overwhelmingly the direction that the Bill takes; there is a whole load of new and complex clauses to add to the corporation tax code this year, though I accept that they are largely to tackle various anti-avoidance measures.
If the Government are minded to review corporation tax, I urge them to review the whole tax completely, to see if we can radically simplify it and take out some of the Act’s 1,330 clauses. I am not sure that we need schedule A, schedule DI, schedule DIII, schedule DV, schedule DVI, trade and non-trade debits, capital versus revenue, and all the many different ways we have of charging companies tax on their profits. We could probably get away with a general tax on income and a general tax on capital, and spare everyone a whole load of adjustments that probably add very little productivity, and certainly add complexity, chances for avoidance and—one way or another—costs to the system.
I tried last year to convince the Government to review whether to allow groups of companies to file a single tax return, rather than them having to file dozens and dozens of separate returns, and then make loads of complex claims to try to mitigate some of the effects of having had to file dozens and dozens of them. They generally only lead to a trap for the unwary, and for people without expensive advice. Large groups with expensive advisers do not fall into traps. Small groups of two or three companies end up with a tax cost that Parliament did not intend them to face, because they make a mistake with their compliance.
If we had such a review, it would make our system a load more competitive and attractive for companies who wanted to invest in this country. I doubt that it would cost anything; I suspect it would be largely revenue-neutral. A few companies might lose around the edges, but the vast majority would gain from the simplicity and the reduced cost. If we are trying to make our business tax system the most attractive in the world, that would be a great step forward. It would stop some of the outdated creaking of our corporation tax system, which has been growing gradually for more than 100 years as we have added a bit here and a bit there. At some stage, we will find that the whole structure is in danger of falling over.
One of my previous tasks was to write reports for people on where to have their head office, or where to invest. I would compare various tax regimes and their attractive features. One of the problems with the United Kingdom is that we could probably tick most of the criteria. There had to be a tick with a little star in brackets next to it beside phrases such as, “Yes, we exempt capital gains on sales of overseas companies,” but that is quite complex and we have difficult rules on what a share is. There are all these policies that are intended to give generous relief to attract investment, but the actual technical detail of the code makes that quite hard.
For a lot of years, when we were trying to exempt tax on the sale of shares in foreign subsidiaries, there was no certainty that even shares in the main German or French company would qualify.

Iain McKenzie: I acknowledge the hon. Gentleman’s extensive knowledge of tax matters. I want to take him back to the Government’s tax rate target of 20%. He acknowledged earlier that the G20 countries would probably follow suit and reduce their corporation tax. Where does he think that the Government will set the rate, if the G20 countries also reduce the tax? Does he envisage a line that they should not or will not cross?

Nigel Mills: I am grateful for the question, but I suspect that that is probably above my pay grade and expertise. I would be incredibly surprised if, in this Parliament, the Government got the rate below 20%. No one has ever signalled to me that that is the idea. I suspect that as the years and Parliaments go by, other countries will gradually reduce their rates, and we may end up feeling pressured to go lower. I suspect that that will be a longer-term direction. If I had to guess, I would say that the aim would be 20% by the end of the Parliament, unless the Minister wants to tell me that he has a secret plan to get corporation tax down to 15% by then. [ Interruption. ] If he told me, it would not be a secret; that is probably true. If he told me, he would probably be in deep trouble.
We have taken trips down various paths of history today. It is worth going back to what the previous Government thought when they came into office in 1997. I was passing time a few minutes ago reading the 1997 Budget speech, which could almost have been given by the current Chancellor. It was about stability being a necessity for generating investment, and a whole load of things that the Labour party believed in 1997, when it was following Conservative spending plans that it gradually stopped believing in as its time in office went on. That was the Budget when the incoming Government reduced the corporation tax rate by 2%. The then Chancellor said:
“My changes in monetary policy were designed to help companies make long-term investment decisions with confidence. My changes in corporation tax are directed to the same long-term objective… I have decided to cut the main rate of corporation tax by 2 per cent., from 33 per cent. to 31 per cent., the lowest ever rate in the United Kingdom. This means that we shall have the lowest corporation tax…of any of our major competitors—Germany, France, America or Japan…This is a long-term commitment which will increase both inward investment and domestic investment to the benefit of the whole country.”—[Official Report, 2 July 1997; Vol. 297, c. 306.]
That is clear evidence that the previous Government realised, as the current Government do, that we must have a competitive corporation tax rate if we want to stimulate domestic investment, and investment from outside the country.
I am perfectly happy and convinced that the Government’s policy of trying to lower the corporation tax rate to, I suspect, 20% is the best way to show that we are a competitive regime that is open for business investment. If we are worrying about a lack of business investment, it would seem incredibly strange to change our minds on corporation tax. That would be reversing our direction and saying to business, “You are not happy to invest at the moment, so we will reduce the return that you would get from that investment by increasing the rate.” It would be a disastrous way to go.
On the shadow Minister’s remarks on tax relief for capital investment, there is a concern that over the years we have ended up, probably accidently, with the least attractive tax regime for infrastructure investment, due to the various parts of structures that do not attract any tax relief. We are trying to encourage private investment in infrastructure, so it might be necessary to review how the regime is working. We need to ensure that our intended policies do not conflict with our aim due to an accidental aspect of the tax regime, especially given the great international competition to attract investment funding.
I strongly recommend that the Minister considers an idea that I gave him last year—the idea of looking at whether we need a separate capital allowance code. We could allow companies simply to relieve their accounts depreciation. Do we need the hassle of all the elections and different codes for long-life and short-life assets, environmentally friendly assets, cars and so on? All that is hugely complex. We want to say to a business, “If that asset will last you five years, and its economic life is five years, have your tax relief over five years. If it is 20 years, have it over 20 years. If it is two years, have it over two years.” That is the right position for a modern tax regime, and one that many of our competitors are in.
I suspect that I will not support the amendment, with its request for a review. I urge the Opposition to table amendments—or perhaps support mine if I choose to table them on Report—on a proper, wholesale review of our corporation tax code, so that it can become a modern, up-to-date code that would attract investment and be attractive for business. I urge the Minister to use the Office for Tax Simplification. It has done sterling work so far, so we know that it can do it. That would be a great project for it.

Owen Smith: The hon. Gentleman is making an interesting speech, and I agree with many of his points. I assure him that if, on Report, he tables amendments of the nature that he has described, we will look carefully at them and may find ourselves supporting them.

Nigel Mills: I am grateful. It is a pity that his predecessor did not find the spirit to do that a year ago. Perhaps there has been an improvement there.

Ian Mearns: The hon. Gentleman would like an overhaul of the corporation tax system; does he think, in line with other areas of Government thinking, that we will see some form of regional variation in corporation tax, to stimulate growth in different parts of the United Kingdom?

Nigel Mills: That is a great question. I must tell the hon. Gentleman that I am not a great believer in regionalisation. I have concerns about us looking at separate corporation tax rates for Scotland—that may be being debated in the main Chamber—and Northern Ireland. I think it is difficult, when we have the same tax codes and the same tax base, to have different rates, because we risk making tax avoidance quite easy. Having a brass plaque company in Edinburgh to take advantage of a lower tax rate is far easier than having a brass plaque company in Geneva or in the Cayman Islands. We have to be careful how we handle separate rates in the same tax regime within one nation. I am not sure I would favour regional corporation tax rates, just because of the ease of avoidance. How would we know where a large company with hundreds of outlets was generating its profits if it chose to account for it all through one part of the country, to achieve a much more beneficial result? I am not sure that that would be a positive step forward.
With those remarks, I urge the Government to take the radical view and simplify and reform the corporation tax system for the benefit of attracting the investment that we desperately need.

Fabian Hamilton: It is a pleasure to speak for the first time under your chairmanship of this Committee, Mr Bone.
I support the amendments tabled by my hon. Friend the Member for Pontypridd. I want to talk for a few moments about the importance of enterprise and small businesses to the economy, something with which I had a lot of experience throughout the late ’70s, the 1980s and until my election in 1997 to this place.
One of the biggest frustrations for small businesses each and every day is without doubt the level of bureaucracy that they have to face to satisfy Governments of all parties—tax forms, VAT forms and all the other things that they have to deal with in order to trade. My company employed five or six people; it is still going, by the way, and now employs 10 people. It is a successful small business. I often used to think that we were kind of unpaid tax collectors. I know that it is a lot easier now with the internet, but in those days, we did not have web filing. I spent a lot of time filling in forms and dealing with inspectors, instead of selling the products and services that we were in business to make a profit from and to employ people to produce. If the Government want to help entrepreneurs and small businesses, which are, after all, the cornerstone of our economy, and which give rise to the greatest potential for economic and employment growth, the bureaucracy needs to be further reduced. The previous Government made an attempt to do that, and this Government need to do a lot more.
On corporation tax, I often thought that it was quite good to pay tax, because that meant that I was making a profit. The biggest problem was being able not only to make a profit but to collect the money that we were owed. It is all very well making a profit on paper, but sometimes customers do not pay because they are in difficulties themselves. In the early 1980s, we experienced that. There was a lot of bad debt, because some companies and individuals who owed us money were not able to pay, as they had not been paid themselves—although some were simply taking advantage of the situation and deliberately not paying, almost on a fraudulent basis. Dealing with that is important and would help companies a lot. The previous Government tried to do that—to have a much tighter code for payment, and to ensure a far greater ability for companies to enforce the payment of debt that they were owed quickly, cheaply and easily, so that they could get money in.
Another problem we faced, of course, which is perhaps a bigger obstacle to enterprise and business than corporation tax and the question of its reduction, welcome though that is, was investment finance and working capital. Working capital is the money needed to keep a business going in order to pay bills and employees. There were many occasions when my business partner and I did not pay ourselves because we did not have enough money coming in. We were making a profit, but we did not have enough to pay ourselves some months; our employees always came first. Then, of course, we had to pay national insurance and tax to the Revenue and, every quarter, VAT.
Working capital aside—that was a perpetual problem, what with the overdraft, and having to negotiate interest rates so that we did not pay too much of the profit in interest to the banks—there was the issue of investment finance. Ours was a graphic design business that also involved print-buying. That made the VAT calculations very complex. I am sure hon. Members will know the complexity of VAT on print. It is difficult because some items attract VAT and others do not.

Nigel Mills: Do not tell the Minister that.

Fabian Hamilton: No, he might put VAT on all print. That was difficult at the time. The still bigger problem was that, as we moved from being a graphic design to a technology company, designing computer systems for pre-press and pre-print, we tried to develop a mass-storage product. It is all totally out of date now, of course. It was based on re-writable optical disks. We went to the United States and sourced all the components of the product, including the necessary software, but the one item we had to try to manufacture was a casing, which was an aluminium extrusion. That was quite complex, and we needed a fair bit of investment finance. We got all our sums together and all our spreadsheets worked out. If we were able to invest in the product and assemble it in the UK from components sourced all over the place, we could make a decent profit out of it. It was a unique product. We went round all the banks, all the sources of possible finance, and it was absolutely impossible to get that money. It was still more difficult because neither of us was willing to put our homes up as loan guarantees or collateral. We had already put our homes up to guarantee our overdraft and working capital.
I contrast that with the attitude of certain countries—very successful nations such as Japan, where getting a loan to buy a property is more difficult than getting a loan to set up a business and invest long-term in an enterprise, an idea, a manufactured product, a service product, or software. My understanding, and I am sure the Minister will agree, is that in countries such as Japan, investment for business can be over 15 or 20 years. If the Treasury and the Government want to encourage greater investment and the growth that we need in enterprise and small businesses, which can then grow further and become medium-sized or larger businesses—thus solving some of our unemployment problems as well as growing the economy—they need to look at long-term capital finance for investment. It worries me that capital allowances are being reduced; they should be dramatically increased. If we are to encourage small businesses, it is investment in the manufacturing product, software or service development that is really important.
I know that one of the answers to this will be that reducing corporation tax means that more of the money earned can be put back into the business. However, I stress again that the profit has to be earned in the first place, and one must ensure that that money comes in to do that. If we give greater tax breaks for that kind of investment from profits, it would act as a considerable incentive.
As a nation, we also do not offer sufficient support to entrepreneurs and small enterprises. I would like a much more level playing field—in fact, an unlevel playing field that incentivises, supports and perhaps gives bias to entrepreneurs and small businesses that want to develop and improve a good idea.
When we were in business, we did quite a bit of work for the public sector. A worry I have about the Government’s shrinkage of the public sector is the effect not only on those who are being put out of work in that sector, but on the interface with the private sector. For a lot of businesses, their income, profits and jobs growth depend on contracts with the public sector. If the public sector is putting less taxpayers’ money into the private sector, because it is generally spending less, that will have a profound impact on the private sector.
I return to the issue of employment. We were very happy to pay what we thought was a good working wage, and we were a trade union house, even though there were only five or six of us at the time. We went to the union and asked, “What is a fair rate for the job?” We were doing skilled work in graphic design, and subsequently in computer consultancy. We paid that rate, but we were often undercut by people who were not prepared to pay a fair rate for the job. We now have a national minimum wage, but it is not nearly enough—certainly not for some skilled jobs that we have. I appreciate that in an environment in which unemployment is high, people might be willing to take less for skilled jobs, less-skilled jobs, or trainee jobs, few as there are at the moment. None the less, a level playing field is extremely important.
To conclude, I would like an awful lot more support for small businesses in the areas I have mentioned—prompt payment, more capital allowances, and providing much easier access to investment capital for good ideas. There could be a unit in the Treasury that entrepreneurs and people who want to set up a business could go to for good, impartial advice. It is often not only about financial incentives; it is about how people do things, or research the market, and help is needed in such areas. If somebody has an idea, they should not just watch Alan Sugar or “Dragon’s Den” on television. They should look at how they can get that idea from their drawing board, piece of paper or computer screen to reality, so that they can start earning money for themselves and the company that they set up, and employ people, thereby growing the economy.
That is what I believe we need. Reducing corporation tax is fine, but it is not the be-all and end-all. It is not the only weapon in the armoury. An awful lot more can be done from the Treasury, and that applies to all Governments. Labour did quite a bit, but not enough, and the Government, in this recession, need to do a lot more.

Simon Kirby: If the previous Government did not do enough, as the hon. Gentleman said, will he apologise?

Fabian Hamilton: I am sorry that the hon. Gentleman thinks we should all go round apologising for things. Nobody gets it right all the time—ever. It is pointless apologising for this or that. I regret the fact that we did not do more.
It always amazes me—hon. Members in this room will recognise this—that after having worked in the real world, where certain expertise, knowledge, understanding and experience is gained, once we come into this place, it is never used for the benefit of the Government or the Opposition, or very rarely, anyway. I put on my form that one of my interests was small businesses, and enterprise and the skills involved, and I do not think I was ever asked to use those skills. I regret that, but it is a function of the bureaucratic nature of Parliament and Government. Perhaps we need to be more aware of the skills that each and every one of us brings to this place, and use them, but I will not apologise. I want lessons learned from the mistakes of the past, so that we can improve the future. There is a crying need to ensure that we have more small businesses and enterprise, so we can grow the economy from the bottom up.

Sam Gyimah: I note the hon. Gentleman’s comments that nobody gets it right all the time when we refer to the previous Government’s record, yet he is quick to criticise this Government as they try to clear up the mess that we are in. He should apply the same standards to the previous Government as to this Government.

Fabian Hamilton: I thank the hon. Gentleman for his intervention, but it seems to me that it is about time that the two parties in the coalition stop saying, “This is nothing to do with us. It is all problems from the previous Labour Government.” They have been in government for two years. I think that it is the anniversary next week. If we are going to improve the lives of the people we represent and the only way to do that is to grow the economy, we have to look at the best way to do that. In my view, people in our country need enterprise, with small businesses and people working for themselves, developing good ideas and products and services. That is where we will make a difference.
Rather than turning around and continually blaming the previous Government for all the things that they should have done—in many ways we have a very good record on so many things—let us look forward and say, “We need to work together and improve this Budget, so that it is genuinely a Budget for growth and jobs.” That way, all the parties of the House can support it.

Charlie Elphicke: It is a pleasure to follow the hon. Gentleman, who has given an extraordinarily thoughtful and non-partisan speech, which this Committee has not been entirely familiar with. I am at least partly guilty for that. It was a thoughtful and powerful speech and I want to put on record my congratulations to him on making such a speech to this Committee. I was genuinely impressed by what he had to say from his business experience.
I am also guilty of having had experience and a life before being elected here at the last general election. I was not a businessman like the hon. Gentleman; I was in the legal business. I was a tax lawyer. As he has said, we are often condemned for what we have done beforehand, but it is through our experience that we see that things have gone wrong and we say, “This should be put right.” I believe that my hon. Friend the Member for Bristol West has not dissimilar experience to me, and he makes the same point as I will make, which is that we should have some substantial change.
Before that, I will briefly touch on this issue of corporation tax stimulus and corporation tax receipts and what the benefits of reducing corporation tax can be. First, there is the issue of stimulus and how much economic growth is increased by reducing corporation taxes. Paragraph 3.64 of the OBR report states that
“we expect a boost to the level of business investment of 1 per cent over the forecast period from the corporation tax rate cut announced in the Budget.”
I know that the hon. Member for Pontypridd is quick to say that that makes no difference and is not very interesting, but my response would be that every move in the right direction towards growth should be welcomed.
I also have a confession to make: I have long been an advocate of cutting corporation tax rates. In my previous life as a tax lawyer, I wrote a paper about the case for cutting business taxes for the Centre for Policy Studies in 2006. I was pleased to see the former Prime Minister then reduce corporation tax in the next Budget, in 2007, for the reasons given by the Exchequer Secretary, which was that it could have a stimulating effect. That was precisely my argument. The evidence that I used was broadly from the period between the 1990s and 2005. Obviously, there have been developments since then, but I was trying to look at how things had progressed and what had happened on inward investment and receipts.
In an earlier intervention on the hon. Member for Pontypridd, I mentioned receipts. When Ireland reduced its tax rate from 38% to 12.5%, the annual revenue growth was 24% a year. As we know, Ireland has had its difficulties since, because its housing market was massively overheated. We have had similar issues. The reduction in corporation tax was not a bad thing for the Irish economy and it did help drive the Celtic tiger and the Celtic boom. It is just unfortunate that it then fed into a property boom, which then led to a property bust, as they often sadly do.
When Australia reduced its corporation tax from 36% to 30% it saw revenue growth in that period of about 16% to 17% each year. When South Africa cut from 35% to 29% it saw quite stunning revenue growth of 43%. It was probably linked to the end of apartheid, which happened around the same time. In fairness, South Africa saw rather more revolution and inward investment for wider political reasons. Nevertheless, the incentivisation would have helped to drive the growth that was seen in South Africa at that time. The Czech Republic, which was moving towards joining the European Union, reduced its tax rate from 31% to 26% and saw tax revenues rise by 11%. There is quite a large body of empirical evidence that indicates, certainly from that time period, that if one reduces the rate one can up the take.

Grahame Morris: I am sorry to interrupt the hon. Gentleman’s flow, but in response to Labour’s Front Bench he is giving examples of countries that have lowered corporation tax rates. I am no expert and I do not have any background in tax law. In South Africa he identified the huge political change. In fact there had been an investment strike; people would not invest in South Africa under the apartheid regime. I know a little bit about the Czech Republic because I spent some time there on holiday. There were significant factors there in terms of changes to property law and whether foreign nationals were allowed residency. Surely that would also have had a major impact on investment?

Charlie Elphicke: I do not decry that at all. I am simply saying that the empirical evidence, which we were challenged to provide, indicates that if one reduces the rate one ups the take. Let us contrast that with economies similar to ours over the same period—America and Japan. In the UK corporation tax revenue was static at 30% when I wrote the paper. Obviously, the former Prime Minister was inspired and reduced the rate of corporation tax after that. The annual growth in corporate revenues from business taxes was 1.7%. In the US it was static at, approximately, an astonishing 40% because there are local state taxes as well. The US saw annual revenue growth from business taxes of just 0.2%—basically flat. In Japan it was static at 41% and there was a fall in corporation tax receipts. So there is a body of evidence that indicates that if one reduces the rate of corporation tax one can increase the amount that is taken. The other area that is of interest is this whole issue of foreign direct investment and whether it flows into or out of one’s country.

Iain McKenzie: I realise that, again, I may be pitching to a tax expert. I have been greatly impressed by you, Mr Bone, and your discussions with Mrs Bone around the breakfast table. I decided that I, too, should talk to Mrs McKenzie more, especially around the breakfast table, and we have been discussing tax. The one thing she will say to me again and again is, “Keep it simple for me.” I do not suggest that we need to dumb down tax for her, because I want to continue eating in the household. The hon. Gentleman is giving lots of facts and figures here, but if he is saying that a reduction in corporation tax equates to inflating the economy, what evidence is there that growth will make its way to what we want to see, which is employment and jobs?

Charlie Elphicke: The hon. Gentleman makes a very fair point. I have referred to the OBR, which says that a reduction in CT has a stimulating effect. The reason why it has a stimulating effect and should create more jobs and money is that a low rate of business taxes encourages other people to come and invest in one’s country. That is just the point I was turning to—foreign direct investment. The inflows for Ireland, Australia and the Czech Republic over this period were really high. They saw massive inflows of foreign direct investment. The contrast is with the UK, Japan and the US. In the UK, we saw an outflow of $404 billion-equivalent. Japan saw an outflow of $223 billion-equivalent, and the US saw an outflow of $50 billion-equivalent. That is the investment into a country versus the investment out of a country. The evidence indicates that, if business tax rates are reduced, people are more likely to invest in a country, which leads in turn to more jobs and money.

Owen Smith: I was not going to bother intervening, but I feel I must. The hon. Gentleman’s argument has more holes than a colander. We have already heard South Africa and the Czech Republic explained. Ireland, of course, is a radically different proposition because it went to a 12.5% corporation tax rate, versus European averages of around 30%. What did Ireland see? It saw a big influx of manufacturing, just as we have seen manufacturing flow into low wage cost places such as Czechoslovakia. During the period he is talking about, Australia saw a boom in the extractive industries, as did Canada. Those examples do not hold water.

Charlie Elphicke: I have no doubt that, given the hon. Gentleman’s position, every single case I mention will be explained away as somehow anomalous, but the trend seems to be quite substantial. That is my case, and it is recognised not only by me and the empirical review I did back then.
The respected Centre for Economics and Business Research has also considered the case and said that a phased reduction of corporation tax—the CEBR takes the radical approach of advocating 12.5%, Irish style—would lead to gross domestic product being 8.7% higher by 2021. Total fixed investment would be some 61% higher, total employment would be 8.7% higher and manufacturing employment would be 10.1% higher. Disposable income would be 9% higher, largely due to a 13.5% boost to wages and salaries, which answers the previous intervention. Consumer spending would be boosted by 2.3% and the savings ratio would be 13.1% higher.
Obviously, I am not an economist—I was just a form of tax lawyer—but I trust the CEBR and its empirical evidence. I think there is a substantial case, and a substantial body of opinion, for reducing corporation tax. The Government are going towards 20%, but I would be much more radical. I stand by what I argued back in 2006 and suggest going to 15%.

Julie Hilling: The hon. Gentleman’s argument is too simplistic: Albania, 10%; Nepal, 5%; and Uzbekistan, 9%. Clearly, the link between corporation tax and investment is far too simple. I do not see vast amounts of international money going into those countries, but Brazil, on 34%, is the new tiger. His arguments are too simplistic to link a decrease or increase in corporation tax with money flowing in or out.

Charlie Elphicke: I am saying that low corporation tax is part of the reason and part of what makes a country attractive, but we need to go a bit further because it is more than just cutting the rate. We need to consider the structure of the corporation tax system, which is very much the point made in amendment 4.
Over the past decade we have seen two major shifts in the corporation tax system that have harmed our take. The previous Government did not act on them, and I understand that they did not do so because of the prawn cocktail circuit, and all the rest of it. They did not want to upset business because they had rebranded the party, and all that sort of stuff, but, actually, they should have taken action.
First, the rise of the internet has made it really easy to avoid tax and erode our tax base. We all know of companies, such as Amazon, that do not pay a penny of tax in the UK, which is unacceptable. Apple does not pay a fair share of taxation on its UK revenues. Google has an effective tax rate of less than 1% in this country, which I addressed on Second Reading.

Jacob Rees-Mogg: I am grateful to my hon. Friend for giving way, because he gave way on exactly the same point on Second Reading, and I am going to make exactly the same point again. As far as he knows are all those companies obeying the law?

Charlie Elphicke: Yes. It is a lovely game to play and say that it is legal. It is avoidance. It is not evasion. It is entirely legal, although Her Majesty’s Revenue and Customs is investigating various companies that have been playing fast and loose with the system. The issue is not whether it is legal, but whether it is acceptable and whether we should change the law and go for a wider reform of tax law. We ought to look at that. If we are going to reduce the rate, we need first to send a clear social message that companies have a corporate social responsibility to pay a fair share, particularly if they are headquartered in the States, building up money in Ireland, ripping off Uncle Sam, ripping us off, and hoping for another Patriot Act to come along so that they can then take all the money back to America without paying tax there either. That is what has been going on. It is not acceptable. Multinationals should regard tax not as an optional extra but as part of their social and corporate responsibility to pay a fair share.

Jacob Rees-Mogg: That is a very eccentric view of taxation. Companies have an obligation to obey the law and pay the taxes that are required under the laws of the countries in which they operate. If we in Parliament are not capable of passing laws that tax them, that is our fault. It is not the fault of the companies.

Charlie Elphicke: I have some sympathy with my hon. Friend’s view. My own view is that we should send a social message to exert social pressure and ensure that companies consider their responsibilities. Yes, we should change the law. We should reform branch taxation so that when Amazon says, “We are in Luxembourg playing the Luxembourg sandwich game and not paying tax to anyone,” we can say, “Actually, you really have a presence here and we are going to treat you as though you have a presence here.”

Owen Smith: I, too, think that that is a slightly curious argument for a Conservative Member to make. I find it slightly entertaining that the hon. Gentleman should be making it. What does he think about the controlled foreign company rule changes included elsewhere in the Bill? Does he think that they are a good idea?

Charlie Elphicke: My issue is not whether we secure the tax base of countries elsewhere, but that we should secure our own tax base. That is the essential thing. What we are talking about is the UK’s tax base. Let us bear it in mind that over a decade of Labour government, until the beginning of the recession in 2008, income tax receipts doubled and corporation tax receipts went up by a third. I am talking about securing our tax base and making it internet-ready for the internet age. Allow me to develop this argument a little further. Yes, the hon. Gentleman can throw partisan rocks and say, “Isn’t it shocking that a Tory MP thinks that people should pay their taxes?” Actually, this Tory MP is Lawsonian. I am saying that if we lower the rate but broaden the base, we get more revenue. Broadening the base is what I am really talking about, but first we should look at the reform of branch taxation and when a company does and does not have a presence in the UK.
Secondly, we should look at the deductions that are taken and what is called thin capitalisation and whether we should have a stronger debt-equity ratio for people seeking deductions on interest rates. We should look at issues such as management charges and whether they are really incurred or just fiddled. We should look at personal service companies, but we will leave that to one side—I do not want to heat up the debate right now—and we should also look at the issue of royalty payments and things like that overseas. There is a raft of issues in relation to the internet age that have not been modernised over the past decade. The time has come to look at it.

Stephen Williams: Does my hon. Friend welcome the coalition Government’s acceptance of the reports put together by Graham Aaronson and his committee? He is the doyen of the tax Bar at which my hon. Friend used to practise, though probably not at the same rates as Mr Aaronson. Does my hon. Friend welcome the fact that the coalition Government are now going to consult for the next 12 months on introducing a general anti-abuse or anti-avoidance rule into the United Kingdom tax code?

Charlie Elphicke: Yes, I do. Inevitably, we are concerned that it can lead to uncertainty. We have to balance the issue of certainty for businesses against the uncertainty of how such a measure might work, because it may be hard to understand. As my hon. Friend will know, there is a real issue there, but I think it is the right thing to do. If we are going to have a reduction in corporation tax, I am simply making the case for looking at the wider structuring of the tax system. I hope that the Government will play catch-up on the past 10 years and ensure that companies that are trading here and have trading revenues here pay their fair share of tax in this country.

Nigel Mills: I have some sympathy with my hon. Friend’s argument. Does he agree that one of the ways in which to achieve the outcome we need is to modernise the underlying corporate tax code, so that we can remove some of the arcane definitions that enable businesses to argue that they are not within the charge to UK tax. If we had sensible, modern definitions, it would be much harder for them to do that.

Charlie Elphicke: I absolutely agree. Part of the change must be making the code far simpler, far more modern and—dare I say it?—far more purposive. We should pursue substance over form when considering international taxation. Historically, in that arena we have pursued form, but we should look at substance and ask the question: is that person paying tax somewhere on that deduction or are they paying no tax at all? When it comes to tax treaties and how they work, that might be a significant way of ensuring that deductions are not going out of the UK and into the Bahamas or other tax havens.
We need to consider these matters. The nation’s finances are a mess and tax receipts are inevitably under pressure because the economy has had a difficult time, so now is the right time to review the situation and ensure that international businesses that trade in the UK pay their fair share to the Exchequer and do not avoid tax, as they have been allowed to do over the past decade.

Nigel Mills: My hon. Friend is not arguing for a common consolidated tax base such as that which the EU has been trying for, which would be hugely damaging to our tax revenues, is he?

Charlie Elphicke: Absolutely not. I apologise for taking up the Committee’s time, but that brings me to the final part of my argument, which is on EU law. We are hampered in securing our tax base, because if we passed a law to do that, half the time we would be accused of being discriminatory under EU law. We need reform in the EU. Why did the EU take that position and why is the European Court of Justice so hawkish about it? The answer is that it wanted a common consolidated EU-wide corporation tax base, so it thought that if it applied a demolition ball to our national tax bases, we would all be forced into submission. No member state wants to go down that route.
It is time for the EU to recognise reality. It should not continue to try to increase its spending, wildly, but help to secure the tax bases of all member states, which have for too long been ripped off by multinationals that have taken advantage of its laws on discrimination. We must consider reform of European law in relation to preserving our tax base. We should also look at procurement rules to ensure that a Government contract is not given to an international company that does not pay tax. If we did so currently, it would be considered discriminatory under European law, but it is right to ensure that everyone pays a fair share of taxation.

Jacob Rees-Mogg: Before my hon. Friend finishes, I want to inquire whether he is going to paint the white cliffs of Dover red.

Charlie Elphicke: I thank my hon. Friend for his typically generous intervention. I should have thought he would be delighted that I am seeking reform and renegotiation of matters relating to Europe—[ Interruption. ]

Peter Bone: Order. As much as I should like to have a general debate, that will not occur.

Charlie Elphicke: To finish, we must consider our tax rate and the structure of our tax system. We must seek reform in the European Union to make it easier for us to improve our system by securing our tax base and ensuring that a fair share of tax is paid. A broader tax base with a lower rate is classically known as Lawsonian and is classically a Conservative phenomenon of the 1980s. It served us well then and would do so now, because it would ensure that businesses that are not headquartered in the UK pay a fair share of tax here.

Graeme Morrice: I am delighted to be called by you again, Mr Bone. I suppose it is a coincidence that as we are discussing corporation tax in Committee, it is being considered in the main Chamber, too, in relation to the Scotland Bill, although the emphasis is on how we all must avoid the race to the bottom.
I shall speak about amendment 12 to clause 5 and amendment 6 to clause 7 and focus my remarks on small businesses and jobs, as did my hon. Friend the Member for Leeds North East. My hon. Friends on the Front Bench have already made it clear that we do not oppose reducing corporation tax. However, the change should not be considered in isolation, because it raises issues about the Government’s overall strategy on growth.
The Chancellor said that the cuts in corporation tax planned for the next two years are likely to be particularly beneficial for big multinational companies. That is undoubtedly true, but as my hon. Friend the Member for Pontypridd pointed out, cutting the corporation tax rate is a blunt tool, with questionable impact as an economic stimulus. Only time will tell whether the benefits derived by the multinationals will support growth or simply go into shareholder dividends.
We know that small businesses are the driving force for growth and jobs. Many will see no benefit at all from the corporation tax cut, as around 90% of businesses with an annual profit of less than £300,000 pay the small companies rate, and as we know, there is no corresponding cut in that rate. The Federation of Small Businesses in Scotland, where my constituency is located, highlighted that point in its reaction to the Budget. It stated that while the
“cut in the main rate of corporation tax will be welcome for those businesses who pay it…there’s no mention of movement in the Small Profits Rate.”

Peter Bone: Order. I just say gently to the hon. Gentleman that while the general point that he is making is one that we have discussed and is okay to discuss in this debate, clause 7 is not being debated at the moment. He might want to wait until we get to that clause.

Graeme Morrice: In deference to you, Mr Bone, I will cut my speech short at this point. I can make the rest of my speech in due course, because I appreciate that we have little time left.

Sheila Gilmore: It is a significant response to the proposals in the Budget, particular those in relation to corporation tax, that the outlook for economic growth given to us by the Office for Budget Responsibility is so limited. That suggests that, however much of a case some people are trying to make for the merits of reducing corporation tax—that that is somehow going to be the tool that will get us out of the deep hole that the economy appears to be in—the OBR clearly does not take that view. That is one of the significant things that we have to think about. I would be interested to hear from the Minister in due course about why he thinks the measures included in the Bill will achieve that aim.
In June 2010, the OBR produced a report—one of the many reports that it has been producing. At that stage, it thought that business investment would rise by 8.1% in 2011 and 10% in 2012. By March 2012, the predictions in its Budget report, when it knew what would be in the Budget and knew of the proposals on corporation tax, were that the growth in business investment in 2012 would only be 0.7%. That does not give us a great deal of optimism for the future.
We have heard a lot of scepticism expressed about certain predictions, and of course they can go up and down. One of the interesting pieces of work from the OBR was produced last autumn, when it looked at what had happened previously. That report is often quoted, particularly by members of the Government, as saying that the recession in 2008 was deeper than previously thought, but the other part of that report said that the recovery from recession was faster and more significant than had been previously thought. I would say that that was substantially due to the serious economic measures that the previous Government introduced. What we are seeing now is the absolute opposite of that. We are seeing no stimulus. Growth is simply not happening now but, even when it was happening, it was doing so sluggishly. There is little confidence.
I heard a lady on the “Today” programme—all I ever do is listen to the “Today” programme—who lives in Waltham Forest. She had been widowed in March, and had a child. She had applied to her council for housing because she was in difficulties following her bereavement. She was offered a house in Walsall, and she was told that if she did not accept it, her homeless application would be terminated.

Fabian Hamilton: Walsall?

Sheila Gilmore: Walsall. She lives in Waltham Forest, not Newham. It struck me that the Government could solve two of their problems at once: the problem with families who are apparently being asked to ship themselves all over the country and the problems with the economy. A substantial and immediate investment in affordable housing would help to solve such problems and, at the same time, stimulate the economy. That would be far more effective in the short term than the measures that we are dealing with under the Bill.

David Gauke: Clause 5 reduces the main corporation tax rate to 24% for the financial year beginning on 1 April 2012. Clause 6 sets the main corporation tax rate to 23% for the financial year beginning on 1 April 2013. The main rate will be cut by an additional 1% in the following year, taking it to just 22% by 2014. As the Chancellor said in his Budget statement, that will give the UK
“a headline rate that is not just lower than our competitors, but dramatically lower, 18% lower than the US, 16% lower than Japan, 12% below France and 8% below Germany…an advertisement for investment and jobs in Britain.”—[Official Report, 21 March 2012; Vol. 542, c. 803.]
The amendments tabled by Opposition Members propose that the Government publish a series of reports looking at aspects of the corporate tax system and structure. Amendment 4 refers to the impact of the corporate tax structure, including the principal rates and investment allowances on the level of business investment. Amendment 5 deals with evidence in favour of using reductions in the headline rate of corporation tax as a means of promoting long-term international competitiveness. Amendment 11 asks about the impact of the corporate tax structure on different sectors, and amendment 12 deals with the impact of the corporation tax rate on growth, jobs and investment in the economy and asks that the Government produce a plan for jobs and growth.
The amendments cover investment, competitiveness, the impact on different businesses and jobs and growth, and I am grateful for the opportunity to discuss such issues together. They will allow me to set out why the Government continue to prioritise reforms to the corporation tax system, as part of their action to repair the UK’s model of economic growth. Before I do so, I want to acknowledge that yesterday the Office for National Statistics published its preliminary estimate of GDP for Q1, 2012. It is clear that the estimate is very disappointing.
The UK is facing a tough economic situation. We are having to pay off massive debts that have been built up during many years, and much of Europe is in recession or heading into it. It is taking longer than anyone hoped to recover from the debt crisis. It is a crisis that we cannot borrow out way out of. As a result of the Government’s credible fiscal plan, the UK is seen as a safe haven from global uncertainty, with market interest rates at record lows helping to keep interest rates lower for families, businesses and the taxpayer. However, alongside the tough decisions taken to help maintain the UK’s fiscal credibility, the Government are taking action to encourage investment and growth. The private sector is critical to economic recovery and tackling the deficit and, for that reason, the UK must demonstrate that it is open for business.
On the amendments, the Government routinely publish detailed information on the corporation tax system. HMRC publishes detailed statistics on corporation tax receipts. The OBR publishes information on the corporation tax forecast in its economic and fiscal outlook. At Budget, HMRC publishes detailed information on proposed changes, in particular tax information and impact notes, and policy costings documents.
As a result of the changes that the Government have brought forward and, in particular, the establishment of the OBR, considerably more information is available to the public on tax changes, and I am proud of the Government’s record on transparency. While I welcome the chance to discuss the issues raised, I do not think there is a case for the Government to produce further reports on the subjects, and I will ask the hon. Member for Pontypridd to withdraw the amendment.
I will consider each amendment in detail. Amendment 4 considers the impact of the corporate tax structure on business investment. Since 2010, the Government have set out plans to reduce the main rate of corporation tax from 28% to 22%. The small profits rate has been reduced to 20%, rather than increased to 22% as proposed by the previous Government. As we debated last year, capital allowance rates and the annual investment allowance threshold have been reduced.
I will say more about the impact of the capital allowances changes when considering amendment 11, but I want to say clearly that, unlike the reforms introduced by the previous Government in 2007, this package reduces the corporate tax burden rather than redistributes it. The cost of capital has been reduced. The OBR forecast from the June 2010 Budget sets out its judgment that the cuts in the corporation tax rate will more than offset the reduction in investment allowances, such that the
“cost of capital for new investment is lower for all non-financial companies, and the rate of return from the existing capital stock is higher”.
There is a wide range of academic research on the impact of tax on investment and growth. Evidence shows that lower corporation tax rates encourage investment. For example, recent studies by Bond University and the OECD find statistically significant growth effects from cuts to rates. In particular, I can highlight the OECD analysis that shows that reducing the amount of revenue raised through corporation tax, compared with other taxes, could lead to an improvement in the productivity of the economy. I do not know whether, for these purposes, the OECD constitutes part of a right-wing conspiracy, but it is certainly supportive of cuts in corporation tax.
The OBR, which has considered the impact on the cost of capital, assesses that the reduction announced in the Budget will increase the level of business investment by around 1% by the end of the forecast period. That is equivalent to an increase in the total amount of business investment of £3.4 billion over the next five years. Reducing the main corporation tax rate to 24% in 2012-13 will reduce the cost of new investment and incentivise activity across the economy. Such investment will help underpin the country’s economic recovery.

Owen Smith: I am not sure if I heard that correctly. Did the Minister say that the total increase in business investment over the spending period would now be £3.4 billion?

David Gauke: I said that the consequences of the corporation tax cuts would result in an increase in the total amount of business investment by £3.4 billion over the next five years; higher than it would otherwise have been.

Owen Smith: I thought I had misheard, because the point I made earlier was that the cost to the Exchequer of the cuts to corporation tax is £19 billion over the spending period. We appear to be getting in return for that £19 billion, £3.4 billion additional business investment. That strikes me as a poor trade-off.

David Gauke: Let me clarify: that £3.4 billion relates to the additional 1% reduction announced in the Budget 2012. I am grateful for the opportunity to clarify that point.
I turn to amendment 5 on international competitiveness. A central element of the Government’s strategy to achieve strong, sustainable and balanced growth is our commitment to improving the UK’s tax competitiveness. The amendment asks about the impact rate cuts have on international competitiveness. Before coming to that question, I would like to say a little about why the Government view competitiveness as important.
We all know that the private sector is critical to the economic recovery and tackling the deficit. As the OBR set out in its economic and fiscal report, it expects
“net trade and business investment to drive medium-term growth”.
The UK must, therefore, demonstrate that it is open for business. Tax competitiveness will depend on a range of factors about how tax, and not just corporation tax, is designed and implemented across different countries. The Government have taken action to improve the UK’s tax competitiveness in a number of areas such as controlled foreign companies and the patent box. We have also helped provide stability by delivering these reforms to a timetable first set out 18 months ago in the corporate tax road map.
I should like to respond to the points raised by the hon. Member for Leeds North East. I am sure he will be aware of the document that HMRC published at the time of the Budget, “Making tax easier, quicker and simpler for small business”. It set out how HMRC will work with small businesses to reduce the tax burden on them. But looking at tax competitiveness, it is widely recognised that headline corporation tax rates have an important role. That is the view of business groups such as the CBI and the Institute of Directors, academics and think tanks such as the Institute for Fiscal Studies. Corporation tax rates have a well-known signalling effect when it comes to attracting international investment. The increasing mobility of international capital has put pressure on corporation tax rates and they have been falling on average over the last two decades.
When this Government came to office, reducing the corporation tax rate had become essential. The competitiveness of our tax system diminished over the last decade as our competitors cut their corporation tax rates further and faster. The Government’s actions are having an impact. The hon. Member for Pontypridd quoted Ernst and Young. The head of tax policy at Ernst and Young, who, coincidentally used to advise the previous Government, said that our measures were helping to take the UK to
“close to best in class”.
The hon. Gentleman also referred to Deloitte. The head of tax policy at Deloitte puts it this way:
“For normal countries, the UK has the most competitive tax regime in Europe, it compares very well with France, Germany, Italy and even the Netherlands.”
On the subject of Deloitte, he referred to some comments by Ian Stewart, the chief economist at Deloitte. Today Deloitte has published a document entitled “United Kingdom: the outlook brightens”. It states:
“Changes in the outlook are often seen first in survey data, and a number of surveys point to a bounce in business confidence.”
The hon. Gentleman may scoff, but the very person he has been praying in aid for his arguments says that prospects are improving.

Owen Smith: The whole point of my argument was that we may well become best in class if what is meant is lowest in the OECD. We are heading in that direction. However, that is not leading to business expanding. It is not leading to growth. How the Minister, the day after a double-dip recession is announced on his watch, can suggest that things are getting bright is absolutely beyond me.

David Gauke: I am merely quoting the very economist whom the hon. Gentleman relied on earlier. I have to make this general observation. I was struck during his lengthy speech by his hostility towards the steps we are taking to reduce corporation tax. [ Interruption. ] He was certainly sceptical about it and questioned whether it was the right thing to do. I understand that the shadow Chief Secretary has said that her party opposes this measure. I certainly stand to be corrected. I am struck by the distance the Labour party has gone. It once sought to be the pro-business party. It once sought to gain the support of business leaders. I met a group of 24 business people last night in Milton Keynes. Their view was that reducing corporation tax was widely welcomed. They have no time for the opposition that we hear from some quarters, including from the Labour party.

Graeme Morrice: We have always said that we do not oppose the measures. Obviously, we have to look at the whole issue in the round. Does the Exchequer Secretary support our proposal of a national insurance holiday for small businesses to encourage growth and to encourage them to take on more employees?

David Gauke: One of the difficulties with that particular measure is that it would come at a considerable cost. It is striking that the Opposition went into the general election with a policy to increase employers’ national insurance contributions. That was their favoured tax of choice. That was their little contribution to reducing the deficit, in addition to a tax that did not raise very much money.

Graeme Morrice: Did the coalition parties not go into the election promising not to increase VAT?

David Gauke: It was clear that the Opposition went into the last general election promising to increase national insurance contributions. Now the Opposition turn around and say that it is the tax that they would cut.

Stephen Barclay: Perhaps my hon. Friend the Exchequer Secretary could update the Committee on what detailed plan the Treasury had to give clarity to the Budget numbers on the cuts and tax proposals put forward by the former Chancellor when he was drawing up his proposals?

David Gauke: There was no detailed plan, other than a plan to substantially increase employers’ national insurance contributions. That was the measure that the Opposition favoured. We were able substantially to reverse that particular policy. I will turn to amendment 11.

Julie Hilling: All of the Budget is about choice, and the choice that the Exchequer Secretary is making with this cut to corporation tax is to benefit large businesses. What is the benefit for small businesses of this cut? The small and medium-sized enterprises are what will drive our economy going forward. At a time when we need to collect every penny of tax that we possibly can, is cutting the tax for the biggest businesses the right choice, or is it a similar choice to cutting the tax for millionaires and making ordinary people pay more?

David Gauke: Let me restate the case for cutting corporation tax. As far as small companies are concerned, we have reduced the rate from 22%, which is what we would have inherited under the Opposition’s plans—I forgot that that was another tax increase that Labour had proposed—to 20%. By cutting the corporation tax rate, we increase the return on investment. By increasing the return on investment, investment is increased, which is good for the economy as a whole, whether it be big or small businesses. This country faces difficulties with the existing uncertainties, the debts that we have inherited and the problems with the eurozone, which are considerable, but the idea that we could somehow solve our problems by abandoning these cuts in corporation tax and getting additional revenue, and that that would be a sensible economy policy is not credible. The hon. Member for Pontypridd is not entirely clear, when I listen to him speak. On the one hand he says that the Opposition are not opposed to the policy and they welcome it, but on the other hand he is full of ideas about why it does not particularly work. The Opposition are again drifting away from business and from the centre ground and are in danger of drifting into irrelevance.

Owen Smith: Will the Exchequer Secretary give way?

David Gauke: I will give way to the hon. Gentleman, whose rhetoric will be listened to carefully by businesses. It will not provide them with any great reassurance that the Opposition have the necessary pro-growth, pro-enterprise approach.

Owen Smith: As someone who spent five years before coming into this House working in some of the most successful businesses in Britain, I am absolutely pro-business and pro-British business. However, there are elements of British business—such as the construction industry, representatives of which I sat down with last week—that fundamentally think the Government should be doing things other than just reducing corporation tax. Other aspects, notably parts of manufacturing, agree. We are not opposing the reduction in corporation tax; it is a useful tool, but it is only one of the tools that the Government could deploy, and they ought to look elsewhere.

David Gauke: That brings me on to amendment 11, on the different sectors and the impact of the corporation tax structure. I suspect that the additional tools, or clubs, that the hon. Gentleman mentions are all further ideas that would result in more borrowing and debt. In the same way that every attempt to cut spending is opposed, Labour Members are full of ideas for further ways in which we can borrow yet more.
A cut in the main rate of corporation tax benefits businesses right across the country. It will lower the tax bills of about 40,000 incorporated businesses that have profits of over £1.5 million and pay at the main rate of CT, and a further 34,000 that have profits between £300,000 and £1.5 million, and pay at the main rate of CT but receive marginal relief. A broad-based measure that reduces the cost of investment across the economy will support all sectors, and means that the Government are not directing investment to a particular part of the economy.
HMRC estimated in 2010 that the package of capital allowance changes and CT cuts—the main rate of CT was to fall to 24% by 2014—would significantly reduce the tax liabilities of the manufacturing sector. The additional 1% cuts this year and in 2011 to the CT rate will further reduce the burden of taxation for the manufacturing sector.
We are reducing the burden of corporation tax on business and the cost of capital across the economy, and, as the Office for Budget Responsibility has recognised, that will support additional business investment in the UK. Business recognises that, too: the CBI said that it sends
“a powerful signal to companies to invest, do business and create jobs in the UK”.
Amendment 12 relates to the Government’s plan for growth. That plan is much wider than corporate tax reform alone, and contains radical reforms to encourage investment and jobs. The growth review is a rolling programme that will run for the whole of this Parliament. It reflects the Government’s top economic priority, which is to achieve strong, sustainable, balanced growth, and to make progress through a number of measures.
First, we are putting the public finances back on a sustainable path. Secondly, we are supporting the flow of credit to UK businesses. Thirdly, the Government are accelerating their supply-side reforms. That has already delivered radical reforms to planning and regulation. The autumn statement and phase two of the growth review announced further reforms, including measures to support about £30 billion of additional capital investment. The Government are making strong progress in implementing the review. The national infrastructure plan sets out the 40 priority infrastructure projects and programmes of national significance that will be the focus of a new Cabinet committee on infrastructure. Many of those projects and programmes will contribute to a more sustainable use of infrastructure.
Amendment 12 also relates to the impact of corporation tax on growth and employment. As we have discussed, the reductions in corporation tax improve the UK’s competitiveness and support business investment. By supporting investment, the corporation tax cut will support growth and employment.
I have clearly set out why there is no need for the reports that the Opposition propose. The cuts in corporation tax are clearly good for business. John Cridland of the CBI said:
“The Chancellor has also painted a clearer vision of how the UK will earn its living in the future and, by seizing the opportunity to make sure our corporate tax system is more internationally competitive, he has sent a powerful signal to companies to invest, do business and create jobs in the UK… An extra one per cent off corporation tax this year could make a big difference to investment intentions.”
I must say that I agree. Reducing the main corporation tax rate to 24% in 2012-13 will reduce the cost of new investment and incentivise activity across the economy. It will support the Government’s ambition to achieve the most competitive tax system in the G20. I therefore move that the clause stand part of the Bill.

Peter Bone: Order. The Minister does not have to move that the clause stand part; that will speed things up later.

Owen Smith: I am grateful to the Minister for his comments, the burden of which was that business welcomes corporation tax reduction and that he stands by what he said about it last year—that it will increase business investment, drive growth, increase productivity, generate jobs and be a general panacea. His arguments would have more force if all the evidence did not point in the opposite direction and he was not standing before us in the aftermath of an announcement by the ONS that we have entered a double-dip recession. This is the longest recession in this country, and the slowest trajectory out of recession, since the 1930s. By the end of this spending period, it could have become the lowest recession since the 1870s. That is the reality.
The proof of the Minister’s pudding, cooked up in No. 11, is in the eating, and it is not going down terribly well right now—certainly not for working families, who face the prospect of more years of recession. We are therefore not minded to withdraw the amendment, although the Minister requests us to. We will not press amendments 11 and 5 to a Division, but we may bring them back on Report. We want to test the will of the Committee on amendments 4 and 12, which relate to two crucial areas where the Government have failed to measure the impact of corporation tax: first, business investment, which is flat under this Government and not responding in the manner the Minister suggests it should; and, secondly, jobs and growth, on which the Government are manifestly not delivering.

Question put, That the amendment be made.

The Committee divided: Ayes 13, Noes 15.

Question accordingly negatived.

Amendment proposed: 12, in clause5,page4,line12,at end add—
‘(3) The Chancellor of the Exchequer shall review the impact of the corporation tax rate on growth, jobs, and investment in the economy, and produce a plan for jobs and growth, which he shall lay before the House of Commons.’.—(Owen Smith.)

Question put, That the amendment be made.

The Committee divided: Ayes 13, Noes 15.

Question accordingly negatived.

Clause 5 ordered to stand part of the Bill.

Clause 6 ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Greg Hands.)

Bill, so far as considered, to be reported, without amendment.